HEALTHEQUITY : Management's discussion and analysis of financial condition and results of operations (form 10-K)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report on Form
10-K. This discussion contains forward-looking statements that reflect our
plans, estimates and beliefs, and involve risks and uncertainties. Our actual
results and the timing of certain events could differ materially from those
anticipated in these forward-looking statements as a result of several factors,
including those discussed in the section titled "Risk factors" included under
Part I, Item 1A and elsewhere in this report. See "Special note regarding
forward-looking statements" on page 1 of this Annual Report.
Overview
We are a leader and an innovator in providing technology-enabled services
platforms that empower consumers to make healthcare saving and spending
decisions. Consumers and employers use our platforms to manage tax-advantaged
HSAs and other CDBs offered by employers, including FSAs and HRAs, COBRA
administration, commuter and other benefits, compare treatment options and
pricing, evaluate and pay healthcare bills, receive personalized benefit
information, access remote and telemedicine benefits, earn wellness incentives,
and receive investment advice to grow their tax-advantaged healthcare savings.
The core of our offerings is the HSA, a financial account through which
consumers spend and save long-term for healthcare expenses on a tax-advantaged
basis. As of January 31, 2020, we administered 5.3 million HSAs, with balances
totaling $11.5 billion, which we call HSA Assets. During the years ended
January 31, 2020 and 2019, we added approximately 1.5 million and 679,000 new
HSAs, respectively. Also, as of January 31, 2020, we administered 7.4 million
complementary CDBs. We refer to the aggregate number of HSAs and other CDBs on
our platforms as Total Accounts, of which we had 12.8 million as of January 31,
2020.
We reach consumers primarily through relationships with their employers, which
we call Clients. We reach Clients primarily through a sales force that calls on
Clients directly, relationships with benefits brokers and advisors, and
integrated partnerships with a network of health plans, benefits administrators,
benefits brokers and consultants, and retirement plan recordkeepers, which we
call Network Partners. As of January 31, 2020, our platforms were integrated
with 165 Network Partners, serving more than 100,000 Clients.
We have grown our share of the growing HSA market from 4% in calendar year 2010
to 16% in 2019, including by 3% as a result of the acquisition of WageWorks on
August 30, 2019. According to Devenir, today we are the largest HSA provider by
accounts and second largest by assets. In addition, we believe we are the
largest provider of other CDBs. We seek to differentiate ourselves through our
proprietary technology, product breadth, ecosystem connectivity, and
service-driven culture. Our proprietary technology is designed to help consumers
optimize the value of their HSAs and other CDBs, as they gain confidence and
skill in their management of financial responsibility for lifetime healthcare.
Our ability to engage consumers is enhanced by our platforms' capacity to
securely share data in both directions with others in the health, benefits, and
retirement ecosystems, which we call Ecosystem Partners. Our commuter benefits
offering also leverages connectivity to an ecosystem of mass transit, ride
hailing, and parking providers. These strengths reflect our "DEEP Purple"
culture of remarkable service to customers and teammates, achieved by driving
excellence, ethics, and process into everything we do.
We earn revenue primarily from three sources: service, custodial, and
interchange. We earn service revenue mainly from fees paid by Clients on a
recurring per-account per-month basis. We earn custodial revenue mainly from HSA
Assets held at our members' direction in federally insured cash deposits,
insurance contracts or mutual funds, and from investment of Client-held funds.
We earn interchange revenue mainly from fees paid by merchants on payments that
our members make using our physical payment cards and virtual platforms. See
"Key components of our results of operations" for additional information on our
sources of revenue, including regarding the adverse impacts caused by the
ongoing COVID-19 pandemic.
Acquisition of WageWorks
On August 30, 2019, we completed the Acquisition of WageWorks and paid
approximately $2.0 billion in cash to WageWorks stockholders, financed through
net borrowings of approximately $1.22 billion under a new term loan facility and
approximately $816.9 million of cash on hand.
We expect the Acquisition to enable us to increase the number of our employer
sales opportunities, the conversion of these opportunities to Clients, and the
value of Clients in generating members, HSA Assets and complementary
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CDBs. WageWorks' strength of selling to employers directly and through health
benefits brokers and advisors complements our distribution through health plans,
benefit administrators and retirement record-keeping partners. With WageWorks'
CDB capabilities, we are working to provide employers with a single partner for
both HSAs and other CDBs, which is preferred by the vast majority of employers
according to research conducted for us by Aite Group. For Clients that partner
with us in this way, we believe we can produce more value by encouraging both
CDB participants to contribute to HSAs and HSA-only members to take advantage of
tax savings by increasing their account balances in other CDBs. Accordingly, we
believe that there are significant opportunities to expand the scope of services
that we provide to our Clients.
The Acquisition has significantly increased the number of our Total Accounts,
HSA Assets, Client-held funds, Adjusted EBITDA, total revenue, total cost of
revenue, operating expenses, and other financial results.
Key factors affecting our performance
We believe that our future performance will be driven by a number of factors,
including those identified below. Each of these factors presents both
significant opportunities and significant risks to our future performance. See
"Results of Operations - Revenue" for information relating to the ongoing
COVID-19 pandemic and also the section entitled "Risk factors" included in Part
1, Item 1A of this Annual Report on Form 10-K and our other reports filed with
the SEC.
WageWorks integration
On August 30, 2019, we completed the Acquisition of WageWorks. We are now
pursuing a multi-year integration effort that we expect will produce long-term
cost savings and revenue synergies. We have identified near-term opportunities,
estimated to be approximately $50 million in annualized ongoing net synergies to
be achieved by the end of fiscal 2021. Furthermore, we anticipate generating
additional revenue synergies over the longer-term as our combined distribution
channels and existing client base take advantage of the broader platform and
service offerings and as we continue to drive member engagement. We estimate
non-recurring costs to achieve these synergies of approximately $80 million to
$100 million realized within 24 to 36 months of the closing of the Acquisition,
resulting from investment in technology platforms, back-office systems and
platform integration, as well as rationalization of cost of operations.
Structural change in U.S. health insurance
We derive revenue primarily from healthcare-related saving and spending by
consumers in the U.S., which are driven by changes in the broader healthcare
industry, including the structure of health insurance. The average premium for
employer-sponsored health insurance has risen by 22% since 2014 and 54% since
2009, resulting in increased participation in HSA-qualified health plans and
HSAs and increased consumer cost-sharing in health insurance more generally. We
believe that continued growth in healthcare costs and related factors will spur
continued growth in HSA-qualified health plans and HSAs and may encourage policy
changes making HSAs or similar vehicles available to new populations such as
individuals in Medicare. However, the timing and impact of these and other
developments in U.S. healthcare are uncertain. Moreover, changes in healthcare
policy, such as proposed "Medicare for all" plans, could materially and
adversely affect our business in ways that are difficult to predict.
Trends in U.S. tax law
Tax law has a profound impact on our business. Our offerings to members,
Clients, and Network Partners consist primarily of services enabled, mandated,
or advantaged by provisions of U.S. tax law and regulations. We believe that the
present direction of U.S. tax policy is favorable to our business, as evidenced
for example by recent regulatory action and bipartisan policy proposals to
expand the availability of HSAs. However, changes in tax policy are speculative,
and may affect our business in ways that are difficult to predict.
Our client base
Our business model is based on a B2B2C distribution strategy, meaning that we
attract Clients and Network Partners to reach consumers to increase the number
of our members with HSA accounts and complementary CDBs. We believe our current
Clients represent a significant opportunity for us, as fewer than 5% presently
partner with us for both HSAs and our complementary CDB offerings.
Broad distribution footprint
We believe we have a diverse distribution footprint to attract new Clients and
Network Partners. Our sales force calls on enterprise, commercial, and regional
employers in industries across the U.S., as well as potential Network Partners
from among health plans, benefits administrators, and retirement plan record
keepers.
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Product breadth
We are the largest custodian and administrator of HSAs (by number of accounts),
as well as a market-share leader in each of the major categories of
complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits
administration. Our Clients and their benefits advisors increasingly seek HSA
providers that can deliver an integrated offering of HSAs and complementary
CDBs. With our newly acquired CDB capabilities, we can provide employers with a
single partner for both HSAs and complementary CDBs, which is preferred by the
vast majority of employers, according to research conducted for us by Aite
Group. We believe that the combination of HSA and complementary CDB offerings
significantly strengthens our value proposition to employers, health benefits
brokers and consultants, and Network Partners as a leading single-source
provider.
Our proprietary technology platforms
We believe that innovations incorporated in our technology that enable consumers
to make healthcare saving and spending decisions and maximize the value of their
tax-advantaged benefits differentiate us from our competitors and drive our
growth. We plan to build on these innovations by combining our HSA platform with
WageWorks' complementary CDB offerings, giving us a full suite of CDB products,
and adding to our solutions set and leadership position within the HSA sector.
We intend to continue to invest in our technology development to enhance our
platforms' capabilities and infrastructure, while maintaining a focus on data
security and the privacy of our customers' data. For example, we are making
significant investments in our platforms' architecture and related platform
infrastructure to improve our transaction processing capabilities and support
continued account and transaction growth, as well as in data-driven personalized
engagement to help our members spend less, save more, and build wealth for
retirement.
Our "DEEP Purple" service culture
The successful healthcare consumer needs education and guidance delivered by
people as well as technology. We believe that our "DEEP Purple" culture, which
we define as Driving Excellence, Ethics, and Process while providing remarkable
service, is a significant factor in our ability to attract and retain customers
and to address nimbly, opportunities in the rapidly changing healthcare sector.
We make significant efforts to promote and foster DEEP Purple within our
workforce. We invest in and intend to continue to invest in human capital
through technology-enabled training, career development, and advancement
opportunities.
Interest rates
As a non-bank custodian, we contract with federally insured banks, credit
unions, and insurance company partners, which we collectively call our
Depository Partners, to hold custodial cash assets on behalf of our members. We
earn a material portion of our total revenue from interest paid to us by these
partners. The lengths of our agreements with Depository Partners generally range
from three to five years and may have fixed or variable interest rate terms. The
terms of new and renewing agreements may be impacted by the then-prevailing
interest rate environment, which in turn is driven by macroeconomic factors and
government policies over which we have no control. Such factors, and the
response of our competitors to them, also determine the amount of interest
retained by our members. We believe that diversification of Depository Partners,
varied contract terms and other factors reduce our exposure to short-term
fluctuations in prevailing interest rates and mitigate the short-term impact of
sustained increases or declines in prevailing interest rates on our custodial
revenue. Over longer periods, sustained shifts in prevailing interest rates
affect the amount of custodial revenue we can realize on custodial assets and
the interest retained by our members.
We expect our custodial revenue to be adversely affected by the interest rate
cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic and
other market conditions that have caused interest rates to decline significantly
and, as a result, funds that we place with our Depository Partners in this
environment will receive lower interest rates than we originally expected.
Interest on our long-term debt changes frequently due to variable interest rate
terms, and as a result, our interest expense is expected to fluctuate based on
changes in prevailing interest rates.
Our competition and industry
Our direct competitors are HSA custodians and other CDB providers. Many of these
are state or federally chartered banks and other financial institutions for
which we believe technology-based healthcare services are not a core business.
Certain of our direct competitors have chosen to exit the market despite
increased demand for these services. This has created, and we believe will
continue to create, opportunities for us to leverage our technology platforms
and capabilities to increase our market share. However, some of our direct
competitors (including well-known mutual fund companies such as Fidelity
Investments and healthcare service companies such as United
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Health Group's Optum) are in a position, should they choose, to devote more
resources to the development, sale, and support of their products and services
than we have at our disposal. In addition, numerous indirect competitors,
including benefits administration technology and service providers, partner with
banks and other HSA custodians to compete with us. Our Network Partners may also
choose to offer competitive services directly, as some health plans have done.
Our success depends on our ability to predict and react quickly to these and
other industry and competitive dynamics.
As a result of the outbreak of the COVID-19 virus, we have seen some impact on
sales opportunities, with some opportunities delayed or now being held
virtually. We may also see a negative impact on the financial results related to
certain of our products, such as commuter benefits, due to many of our members
working from home during the outbreak or other impacts from the outbreak. The
extent to which the COVID-19 virus will negatively impact our business is highly
uncertain and cannot be accurately predicted.
Regulatory environment
Federal law and regulations, including the Affordable Care Act, the Internal
Revenue Code, the Employee Retirement Income Security Act and Department of
Labor regulations, and public health regulations that govern the provision of
health insurance and provide the tax advantages associated with our products,
play a pivotal role in determining our market opportunity. Privacy and data
security-related laws such as the Health Insurance Portability and
Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, laws governing the
provision of investment advice to consumers, such as the Investment Advisers Act
of 1940, or the Advisers Act, the USA PATRIOT Act, anti-money laundering laws,
and the Federal Deposit Insurance Act, all play a similar role in determining
our competitive landscape. In addition, state-level regulations also have
significant implications for our business in some cases. For example, our
subsidiary HealthEquity Trust Company is regulated by the Wyoming Division of
Banking, and several states are considering, or have already passed, new privacy
regulations that can affect our business. Various states also have laws and
regulations that impose additional restrictions on our collection, storage, and
use of personally identifiable information. Privacy regulation in particular has
become a priority issue in many states, including California, which in 2018
enacted the California Consumer Privacy Act broadly regulating California
residents' personal information and providing California residents with various
rights to access and control their data. Our ability to predict and react
quickly to relevant legal and regulatory trends and to correctly interpret their
market and competitive implications is important to our success.
Our acquisition strategy
In addition to the WageWorks acquisition, we have a successful history of
acquiring HSA portfolios from competitors who have chosen to exit the industry
and complementary assets and businesses that strengthen our platform. We seek to
continue this growth strategy and are regularly engaged in evaluating different
opportunities. We have developed an internal capability to source, evaluate, and
integrate acquired HSA portfolios. We intend to continue to thoughtfully pursue
acquisitions of complementary assets and businesses that we believe will
strengthen our platform.
Key financial and operating metrics
Our management regularly reviews a number of key operating and financial metrics
to evaluate our business, determine the allocation of our resources, make
decisions regarding corporate strategies, and evaluate forward-looking
projections and trends affecting our business. We discuss certain of these key
financial metrics, including revenue, below in the section entitled "Key
components of our results of operations." In addition, we utilize other key
metrics as described below.
For a discussion related to key financial and operating metrics for fiscal 2019
compared to fiscal 2018, refer to Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations in our fiscal 2019
Form 10-K, filed with the SEC on March 28, 2019.







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Total Accounts
The following table sets forth our HSAs, CDBs, and Total Accounts as of and for
the periods indicated:
                                                                                                              % change from
(in thousands, except percentages)                       January 31, 2020          January 31, 2019            2019 to 2020
HSAs                                                             5,344                     3,994                         34  %
Average HSAs - Year-to-date                                      4,517                     3,608                         25  %
Average HSAs - Quarter-to-date                                   5,179                     3,813                         36  %
New HSAs from Sales - Year-to-date                                 724                       674                          7  %
New HSAs from Acquisitions - Year-to-date                          757                         5                        n/a
New HSAs from Sales - Quarter-to-date                              379                       341                         11  %
Active HSAs                                                      4,348                     3,241                         34  %
HSAs with investments                                              220                       163                         35  %
CDBs                                                             7,437                       572                        n/a
Total Accounts                                                  12,781                     4,566                        180  %
Average Total Accounts - Year-to-date                            8,013                     4,194                         91  %
Average Total Accounts - Quarter-to-date                        12,603                     4,402                        186  %


The number of our HSAs and CDBs are key metrics because our revenue is driven by
the amount we earn from them. The number of our HSAs increased by approximately
1.4 million, or 34%, from January 31, 2019 to January 31, 2020, primarily driven
by the HSAs acquired through the Acquisition of WageWorks and other HSA
portfolio acquisitions, which contributed approximately 757,000 HSAs. The
remainder of the increase was due to further penetration into existing Network
Partners and the addition of new Network Partners. The number of our CDBs
increased by approximately 6.9 million from January 31, 2019 to January 31,
2020, primarily driven by the CDBs acquired through the Acquisition of
WageWorks.
HSAs are individually owned portable healthcare accounts. As HSA members
transition between employers or health plans, they may no longer be enrolled in
an HDHP that qualifies them to continue to make contributions to their HSA. If
these HSA members deplete their custodial balance, we may consider the
corresponding HSA no longer an Active HSA. We define an Active HSA as an HSA
that (i) is associated with a Network Partner or a Client, in each case as of
the end of the applicable period; or (ii) has held a custodial balance at any
point during the previous twelve month period. Active HSAs increased by
approximately 1.1 million, or 34%, from January 31, 2019 to January 31, 2020,
primarily driven by the HSAs acquired through the Acquisition of WageWorks and
other HSA portfolio acquisitions. The remainder of the increase was due to
further penetration into existing Network Partners and the addition of new
Network Partners.
HSA Assets
The following table sets forth our HSA Assets as of and for the periods
indicated:
                                                                                                            % change from
(in millions, except percentages)                      January 31, 2020         January 31, 2019          2019 to 2020
HealthEquity HSA cash (custodial revenue) (1)        $        7,244           $        6,428                        13  %
WageWorks HSA cash (custodial revenue) (2)                    1,057                        -                       n/a
WageWorks HSA cash (no custodial revenue) (3)                   383                        -                       n/a
Total HSA cash                                                8,684                    6,428                        35  %
HealthEquity HSA investments (custodial
revenue) (1)                                                  2,495                    1,670                        49  %
WageWorks HSA investments (no custodial
revenue) (3)                                                    362                        -                       n/a
Total HSA investments                                         2,857                    1,670                        71  %
Total HSA Assets                                             11,541                    8,098                        43  %
Average daily HealthEquity HSA cash -
Year-to-date                                                  6,523                    5,586                        17  %
Average daily HealthEquity HSA cash -
Quarter-to-date                                      $        6,788           $        5,837                        16  %

(1) HSA Assets administered by HealthEquity that generate custodial revenue. These amounts exclude HSA Assets administered by WageWorks. (2) HSA Assets administered by WageWorks that generate custodial revenue. (3) HSA Assets administered by WageWorks that do not generate custodial revenue.

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Our HSA Assets, which are our HSA members' assets for which we are the custodian
or administrator, or from which we generate custodial revenue, consist of the
following components: (i) cash deposits, which are deposits with our Depository
Partners or custodians of HSAs administered by WageWorks, (ii) custodial cash
deposits invested in an annuity contract with our insurance company partner, and
(iii) investments in mutual funds through our custodial investment fund
partners. We are working to transition WageWorks HSA cash to HealthEquity HSA
cash in fiscal 2021. Measuring our HSA Assets is important because our custodial
revenue is directly affected by average daily custodial balances for HSA Assets
that are revenue generating.
Our total HSA Assets increased by $3.4 billion, or 43%, from January 31, 2019 to
January 31, 2020, including $1.7 billion of HSA Assets acquired through the
Acquisition of WageWorks and other HSA portfolio acquisitions and $1.7 billion
from existing HSA members and new HSA members.
Our HSA investment assets increased by $1.2 billion, or 71%, from January 31,
2019 to January 31, 2020, reflecting the Acquisition of WageWorks and our
strategy of helping our HSA members build wealth and invest for retirement.
Client-held funds
                                                                                                                                  % change from
(in millions, except percentages)                     January 31, 2020          January 31, 2019           2019 to 2020

Client-held funds (custodial revenue) (1) $ 779

  $           -                          n/a
Average daily Client-held funds -
Year-to-date (1)                                              382                        -                          n/a
Average daily Client-held funds -
Quarter-to-date (1)                                           727                        -                          n/a


(1) Client-held funds that generate custodial revenue. The Company did not hold
material Client-held funds prior to the Acquisition.
Our Client-held funds are interest earning deposits from which we generate
custodial revenue. These deposits are amounts remitted by Clients and held by us
on their behalf to pre-fund and facilitate administration of CDBs. We deposit
the Client-held funds with our Depository Partners in interest-bearing, demand
deposit accounts that have a floating interest rate and no set term or duration.
Our total Client-held funds increased by $779.0 million from January 31, 2019 to
January 31, 2020, due to the Acquisition of WageWorks.
Adjusted EBITDA
We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted
earnings before interest, taxes, depreciation and amortization, amortization of
acquired intangible assets, stock-based compensation expense, merger integration
expenses, acquisition costs, gains and losses on marketable equity securities,
and certain other non-operating items. We believe that Adjusted EBITDA provides
useful information to investors and analysts in understanding and evaluating our
operating results in the same manner as our management and our board of
directors because it reflects operating profitability before consideration of
non-operating expenses and non-cash expenses, and serves as a basis for
comparison against other companies in our industry.



















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The following table presents a reconciliation of net income, the most comparable
GAAP financial measure, to Adjusted EBITDA for the periods indicated:
                                                         Year ended January 31,
(in thousands)                                             2020            2019
Net income                                       $    39,664       $  73,899
Interest income                                       (5,905)         (1,946)
Interest expense                                      24,772             270
Income tax provision                                   3,491           1,919
Depreciation and amortization                         20,648          12,256
Amortization of acquired intangible assets            34,704           

5,929

Stock-based compensation expense                      30,107          

21,057

Merger integration expenses (1)                       32,111               -
Acquisition costs (2)                                 40,810           

2,121

(Gain) loss on marketable equity securities          (27,760)            102
Other (3)                                              3,811           2,775
Adjusted EBITDA                                  $   196,453       $ 118,382


(1)For the year ended January 31, 2020, merger integration expenses include
$1.6 million of stock-based compensation expense related to post-Acquisition
integration activities.
(2)For the year ended January 31, 2020, acquisition costs include $13.7 million
of stock-based compensation expense related to awards that were accelerated in
connection with the Acquisition.
(3)For the years ended January 31, 2020 and 2019, Other consisted of
amortization of incremental costs to obtain a contract of $1.9 million and
$1.5 million, and other costs of $1.9 million and $1.3 million, respectively.
The following table further sets forth our Adjusted EBITDA as a percentage of
revenue:
                                                             Year ended January 31,                                   % change from
(in thousands, except percentages)                        2020                 2019            2019 to 2020
Adjusted EBITDA                                $    196,453          $   118,382                         66  %
As a percentage of revenue                               37  %                41  %


Our Adjusted EBITDA increased by $78.1 million, or 66%, from $118.4 million for
the year ended January 31, 2019 to $196.5 million for the year ended January 31,
2020. The increase in Adjusted EBITDA was driven by the overall growth of our
business and by the Acquisition.
Our use of Adjusted EBITDA has limitations as an analytical tool, and it should
not be considered in isolation or as a substitute for analysis of our results as
reported under GAAP.
Key components of our results of operations
Acquisition of WageWorks
As the Acquisition closed on August 30, 2019, only five months of WageWorks'
results of operations are included in our consolidated results of operations.
Accordingly, the results of operations attributable to WageWorks may not be
directly comparable to WageWorks' results of operations reported by WageWorks
prior to the Acquisition.
Revenue
We generate revenue from three primary sources: service revenue, custodial
revenue, and interchange revenue.
Service revenue.  We earn service revenue from the fees we charge our Network
Partners, Clients, and members for the administration services we provide in
connection with the HSAs and other CDBs we offer. With respect to our Network
Partners and Clients, our fees are generally based on a fixed tiered structure
for the duration of the relevant service agreement and are paid to us on a
monthly basis. We recognize revenue on a monthly basis as services are rendered
to our members and Clients. As a result of the WageWorks Acquisition, service
revenue now comprises a majority of our revenue.
Custodial revenue.  We earn custodial revenue primarily from our HSA Assets
deposited with our Depository Partners and with our insurance company partner,
Client-held funds deposited with our Depository Partners, and recordkeeping fees
we earn in respect of mutual funds in which our members invest. We deposit the
HealthEquity HSA cash with our Depository Partners pursuant to contracts that
(i) generally have terms ranging from three to five
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years, (ii) provide for a fixed or variable interest rate payable on the average
daily cash balances deposited with the relevant Depository Partner, and
(iii) have minimum and maximum required deposit balances. We deposit the
Client-held funds with our Depository Partners in interest-bearing, demand
deposit accounts that have a floating interest rate and no set term or duration.
We earn custodial revenue on HSA Assets and Client-held funds that is based on
the interest rates offered to us by these Depository Partners. In addition, once
a member's HSA cash balance reaches a certain threshold, the member is able to
invest his or her HSA Assets in mutual funds through our custodial investment
partner. We earn a recordkeeping fee, calculated as a percentage of custodial
investments. We are working to transition WageWorks HSA cash to HealthEquity HSA
cash in fiscal 2021.
Interchange revenue.  We earn interchange revenue each time one of our members
uses one of our payment cards to make a purchase. This revenue is collected each
time a member "swipes" our payment card to pay expenses. We recognize
interchange revenue monthly based on reports received from third parties,
namely, the card-issuing banks and card processors.
Cost of revenue
Cost of revenue includes costs related to servicing accounts, managing Client
and Network Partner relationships and processing reimbursement claims.
Expenditures include personnel-related costs, depreciation, amortization,
stock-based compensation, common expense allocations (such as office rent,
supplies, and other overhead expenses), new member and participant supplies, and
other operating costs related to servicing our members. Other components of cost
of revenue include interest retained by members on HealthEquity HSA cash and
interchange costs incurred in connection with processing card transactions for
our members.
Service costs.  Service costs include the servicing costs described above.
Additionally, for new accounts, we incur on-boarding costs associated with the
new accounts, such as new member welcome kits, the cost associated with issuance
of new payment cards, and costs of marketing materials that we produce for our
Network Partners.
Custodial costs.  Custodial costs are comprised of interest retained by our HSA
members, in respect of HealthEquity HSA cash, and fees we pay to banking
consultants whom we use to help secure agreements with our Depository Partners.
Interest retained by HSA members is calculated on a tiered basis. The interest
rates retained by HSA members can change based on a formula or upon required
notice.
Interchange costs.  Interchange costs are comprised of costs we incur in
connection with processing payment transactions initiated by our members. Due to
the substantiation requirement on FSA/HRA-linked payment card transactions,
payment card costs are higher for FSA/HRA card transactions. In addition to
fixed per card fees, we are assessed additional transaction costs determined by
the amount of the transaction.
Gross profit and gross margin
Our gross profit is our total revenue minus our total cost of revenue, and our
gross margin is our gross profit expressed as a percentage of our total revenue.
Our gross margin has been and will continue to be affected by a number of
factors, including interest rates, the amount we charge our Network Partners,
Clients, and members, how many services we deliver per account, and payment
processing costs per account.
Operating expenses
Sales and marketing.  Sales and marketing expenses consist primarily of
personnel and related expenses for our sales and marketing staff, including
sales commissions for our direct sales force, external agent/broker commission
expenses, marketing expenses, depreciation, amortization, stock-based
compensation, and common expense allocations.
Technology and development.  Technology and development expenses include
personnel and related expenses for software development and delivery,
information technology, data management, product, and security. Technology and
development expenses also include software engineering services, the costs of
operating our on-demand technology infrastructure, depreciation, amortization of
capitalized software development costs, stock-based compensation, and common
expense allocations.
General and administrative.  General and administrative expenses include
personnel and related expenses of, and professional fees incurred by our
executive, finance, legal, internal audit, corporate development, compliance,
and people departments. They also include depreciation, amortization,
stock-based compensation, and common expense allocations.
Amortization of acquired intangible assets.  Amortization of acquired intangible
assets results primarily from intangible assets acquired in connection with
business combinations. The assets include acquired customer relationships,
acquired developed technology, and acquired trade names and trademarks, which we
amortize over
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the assets' estimated useful lives, estimated to be 10-15 years, 2-5 years, and
3 years, respectively. We also acquired intangible HSA portfolios from
third-party custodians. We amortize these assets over the assets' estimated
useful life of 15 years. We evaluate our acquired intangible assets for
impairment annually, or at a triggering event.
Merger integration.  Merger integration expenses include personnel and related
expenses, including severance, professional fees, and technology-related
expenses directly related to the integration activities to merge operations as a
result of the Acquisition.
Interest expense
Interest expense consists of accrued interest expense and amortization of
deferred financing costs associated with our credit agreement. Interest on our
long-term debt changes frequently due to variable interest rate terms, and as a
result, our interest expense is expected to fluctuate based on changes in
prevailing interest rates.
Other expense, net
Other expense, net, primarily consists of acquisition costs, gains and losses on
marketable equity securities, and non-income-based taxes, less interest income
earned on corporate cash.
Income tax provision
We are subject to federal and state income taxes in the United States based on a
calendar tax year which differs from our fiscal year-end for financial reporting
purposes. We use the asset and liability method to account for income taxes,
under which current tax liabilities and assets are recognized for the estimated
taxes payable or refundable on the tax returns for the current fiscal year.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, net operating loss carryforwards, and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted statutory tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amount
expected to be realized. As of January 31, 2020, we have recorded an overall net
deferred tax liability with the exception of an insignificant amount of federal
capital losses recorded as a net deferred tax asset on our consolidated balance
sheet.
Results of operations
For a discussion related to the results of operations and liquidity and capital
resources for fiscal 2019 compared to fiscal 2018, refer to Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our fiscal 2019 Form 10-K, filed with the SEC on March 28, 2019.
Revenue
The following table sets forth our revenue for the periods indicated:
                                                  Year ended January 31,
(in thousands, except percentages)                  2020            2019     $ change         % change
Service revenue                           $   262,868       $ 100,564       $ 162,304              161  %
Custodial revenue                             181,892         126,178          55,714               44  %
Interchange revenue                            87,233          60,501          26,732               44  %
Total revenue                             $   531,993       $ 287,243       $ 244,750               85  %


Service revenue. The $162.3 million, or 161%, increase in service revenue was
primarily due to the inclusion of WageWorks' financial results following the
Acquisition, which contributed $154.5 million of the increase. The remainder of
the increase resulted from the increase in the number of HSAs, partially offset
by lower service revenue per average HSA.
The number of our HSAs increased by approximately 1.4 million, or 34%, due in
part to approximately 757,000 acquired HSAs. The remainder of the increase was
due to further penetration into existing Network Partners and the addition of
new Network Partners.
Service revenue as a percentage of our total revenue increased primarily due to
the inclusion of WageWorks' financial results, whose total revenue is comprised
primarily of service revenue, following the Acquisition.
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Custodial revenue. The $55.7 million, or 44%, increase in custodial revenue was
primarily due to an increase in average daily HealthEquity HSA cash of
$937.0 million, or 17%, and an increase in the yield on average custodial cash
from 2.15% in the year ended January 31, 2019 to 2.38% in the year ended
January 31, 2020. The inclusion of WageWorks' financial results following the
Acquisition contributed $9.2 million of custodial revenue in the year ended
January 31, 2020.
Custodial revenue as a percentage of our total revenue decreased primarily due
to the inclusion of WageWorks' financial results following the Acquisition,
which included relatively less custodial revenue.
In fiscal 2021, we intend to move the majority of WageWorks HSA cash to
HealthEquity HSA cash. This cash will be placed with our Depository Partners at
prevailing interest rates, which we expect will generate additional custodial
revenue.
Interchange revenue. The $26.7 million, or 44%, increase in interchange revenue
was primarily due to the inclusion of WageWorks' financial results following the
Acquisition, which contributed $21.0 million of the increase. The remainder of
the increase resulted from the increase in the number of our HSAs and payment
activity, partially offset by the lower interchange revenue per HSA described
below.
Total revenue. Total revenue increased by $244.8 million, or 85%, primarily due
to the inclusion of WageWorks' financial results following the Acquisition and
related realized net synergies, which together contributed $184.7 million.
We expect our business to be adversely affected by the recent outbreak of the
COVID-19 virus, including as a result of the associated interest rate cuts by
the Federal Reserve and other market conditions that have caused interest rates
to decline significantly and, as a result, funds that we place with our
depository partners in this environment will receive lower interest rates than
we originally expected. Sales opportunities have also been impacted, with some
opportunities delayed or now being held virtually. We may be unable to meet our
service level commitments to our clients as a results of disruptions to our work
force and disruptions to third part contracts that we rely on to provide our
services. Our financial results related to certain of our products may be
adversely affected, such as commuter benefits, due to many of our members
working from home during the outbreak or other impacts from the outbreak.
Clients may be unable to pay fees required under contracts and exercise "force
majeure" or similar clauses, which would negatively impact our financial
results. The extent to which the COVID-19 virus will negatively impact our
business remains highly uncertain and as a result may have a material adverse
impact on our business and financial results.
Cost of revenue
The following table sets forth our cost of revenue for the periods indicated:
                                                  Year ended January 31,
(in thousands, except percentages)                  2020            2019     $ change         % change
Service costs                             $   170,863       $  76,858       $  94,005              122  %
Custodial costs                                17,563          14,124           3,439               24  %
Interchange costs                              17,658          15,068           2,590               17  %
Total cost of revenue                     $   206,084       $ 106,050       $ 100,034               94  %


Service costs. The $94.0 million, or 122%, increase in service costs was
primarily due to the inclusion of WageWorks' financial results following the
Acquisition, which contributed $80.6 million of the increase. The remainder of
the increase resulted from a higher volume of total accounts being serviced,
including $7.8 million related to the hiring of additional personnel to
implement and support our new Network Partners, Clients, and HSA members,
increased stock-based compensation expense of $2.0 million, and increases in
other expenses of $2.7 million.
Custodial costs. The $3.4 million, or 24%, increase in custodial costs was due
to an increase in average daily HealthEquity HSA cash from $5.6 billion for the
year ended January 31, 2019 to $6.5 billion during the year ended January 31,
2020.
Interchange costs. The $2.6 million, or 17%, increase in interchange costs
resulted from an overall increase in payment activity, attributable to the
growth in average Total Accounts, and the inclusion of WageWorks' financial
results, which contributed $1.3 million to the increase.
Total cost of revenue. As we continue to add HSAs and other CDBs, we expect that
our cost of revenue will increase in dollar amount to support our Network
Partners, Clients, and members. Cost of revenue will continue to
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be affected by a number of different factors, including our ability to scale our
service delivery, Network Partner implementation and account management
functions.
Operating expenses
The following table sets forth our operating expenses for the periods indicated:
                                                           Year ended January 31,
(in thousands, except percentages)                        2020               2019        $ change              % change
Sales and marketing                             $    43,951          $  29,498          $  14,453                    49  %
Technology and development                           77,576             35,057             42,519                   121  %
General and administrative                           60,561             33,039             27,522                    83  %
Amortization of acquired intangible assets           34,704              5,929             28,775                   485  %
Merger integration                                   32,111                  -             32,111                   n/a
Total operating expenses                        $   248,903          $ 103,523          $ 145,380                   140  %


Sales and marketing. The $14.5 million, or 49%, increase in sales and marketing
expenses was due in large part to the inclusion of WageWorks' financial results
following the Acquisition, which contributed $7.1 million of the increase. The
remainder of the increase consisted of increased staffing and sales commissions
of $3.6 million, increased stock-based compensation expense of $1.2 million,
increased partner commissions of $1.4 million, and an increase in other expenses
of $1.2 million.
We expect our sales and marketing expenses to increase for the foreseeable
future as we continue to increase the size of our sales and marketing
organization and expand into new markets. On an annual basis, we expect our
sales and marketing expenses to remain steady as a percentage of our total
revenue. However, our sales and marketing expenses may fluctuate as a percentage
of our total revenue from period to period due to the seasonality of our total
revenue and the timing and extent of our sales and marketing expenses.
Technology and development. The $42.5 million, or 121%, increase in technology
and development expenses was primarily due to the inclusion of WageWorks'
financial results following the Acquisition, which contributed $25.9 million of
the increase. The remainder of the increase resulted from the hiring of
additional personnel of $8.9 million, increased outside contractors and
professional services of $9.9 million, increased technology expense of $1.6
million, increased amortization and depreciation of $1.2 million, stock
compensation of $1.8 million, and other expenses of $1.0 million, which were
partially offset by an increase in capitalized engineering costs of $9.3 million
associated with the development and enhancement of our proprietary technology
platforms.
We expect our technology and development expenses to increase for the
foreseeable future as we continue to invest in the development and security of
our proprietary platforms. On an annual basis, we expect our technology and
development expenses to increase as a percentage of our total revenue pursuant
to our growth initiatives. Our technology and development expenses may fluctuate
as a percentage of our total revenue from period to period due to the
seasonality of our total revenue and the timing and extent of our technology and
development expenses.
General and administrative. The $27.5 million, or 83%, increase in general and
administrative expenses was primarily due to the inclusion of WageWorks'
financial results following the Acquisition, which contributed $19.7 million of
the increase. The remainder of the increase was as a result of increases in
hiring of additional personnel of $2.0 million, increased stock compensation of
$3.4 million, increased professional fees of $1.5 million and increased other
expenses of $0.9 million.
We expect our general and administrative expenses to increase for the
foreseeable future due to the additional demands on our legal, compliance,
accounting, and insurance functions that we incur as we continue to grow our
business, as well as other costs associated with being a public company. On an
annual basis, we expect our general and administrative expenses to remain steady
as a percentage of our total revenue over the near term pursuant to our growth
initiatives. Our general and administrative expenses may fluctuate as a
percentage of our total revenue from period to period due to the seasonality of
our total revenue and the timing and extent of our general and administrative
expenses.
Amortization of acquired intangible assets
The $28.8 million increase in amortization of acquired intangible assets was
primarily a result of the identified intangible assets acquired as part of the
Acquisition of WageWorks.


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Merger integration
The $32.1 million in merger integration expense for the year ended January 31,
2020 was due to personnel and related expenses, including severance,
professional fees, and technology-related expenses directly related to the
Acquisition. We expect integration expenses totaling $80 million to $100 million
in the aggregate to continue for 24 to 36 months following the closing of the
Acquisition, which closed on August 30, 2019.
Interest expense
The $24.8 million in interest expense for the year ended January 31, 2020
consists primarily of interest accrued under our term loan facility and
amortization of financing costs. We expect interest expense to decrease as a
result of interest rate cuts by the Federal Reserve and principal repayments
required pursuant to our credit agreement.
Other expense, net
The $7.5 million increase in other expense, net resulted primarily from an
increase in acquisition costs of $38.7 million and an increase in miscellaneous
taxes of $0.8 million, offset by an increase in gains on marketable securities
of $27.9 million and an increase in interest income of $4.0 million.
Income tax provision
Income tax provision for the years ended January 31, 2020 and 2019 was $3.5
million and $1.9 million, respectively. The increase in income tax provision was
primarily the result of a decrease in excess tax benefits on stock-based
compensation expense recognized in the provision for income taxes relative to
our pre-tax income and an increase in non-deductible expenses, which were offset
by exclusion of the gain in connection with our equity investment in WageWorks
that will not be realized for income tax purposes.
Our effective income tax rate for the years ended January 31, 2020 and 2019 was
8.1% and 2.5%, respectively. The difference between the effective income tax
rate and the U.S. federal statutory income tax rate each period is impacted by a
number of factors, including the relative mix of earnings among state
jurisdictions, credits, excess tax benefits or shortfalls on stock-based
compensation expense due to the adoption of ASU 2016-09, and other discrete
items. The increase in the effective tax rate for the year ended January 31,
2020 was primarily due to a decrease in excess tax benefits on stock-based
compensation expense recognized in the provision for income taxes relative to
our pre-tax income and an increase in non-deductible expenses, which were offset
by exclusion of the gain in connection with our equity investment in WageWorks
that will not be realized for income tax purposes.
Seasonality
Seasonal concentration of our growth combined with our recurring revenue model
create seasonal variation in our results of operations. A significant number of
new and existing Network Partners bring us new HSAs and CDBs beginning in
January of each year concurrent with the start of many employers' benefit plan
years. Before we realize any revenue from these new accounts, we incur costs
related to implementing and supporting our new Network Partners and new
accounts. These costs of services relate to activating accounts and hiring
additional staff, including seasonal help to support our member support center.
These expenses begin to ramp up during our third fiscal quarter with the
majority of expenses incurred in our fourth fiscal quarter.
Liquidity and capital resources
Cash and cash equivalents overview
As of January 31, 2020, our principal source of liquidity was our current cash
and cash equivalents balances, collections from our service, custodial and
interchange revenue activities, and availability under our revolving credit
facility described below. We rely on cash provided by operating activities to
meet our short-term liquidity requirements, which primarily relate to the
payment of corporate payroll and other operating costs, payments required
pursuant to our credit agreement, and capital expenditures.
As of January 31, 2020 and January 31, 2019, cash and cash equivalents were
$191.7 million and $361.5 million, respectively.
Capital resources
We have a "shelf" registration statement on Form S-3 on file with the SEC.
This shelf registration statement, which includes a base prospectus, allows us
at any time to offer any combination of securities described in the prospectus
in one or more offerings. Unless otherwise specified in a prospectus
supplement accompanying the base prospectus, we would use the net proceeds from
the sale of any securities offered pursuant to the shelf registration statement
for general corporate purposes, including, but not limited to, working capital,
sales and
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marketing activities, general and administrative matters and capital
expenditures, and if opportunities arise, for the acquisition of, or investment
in, assets, technologies, solutions or businesses that complement our business.
Pending such uses, we may invest the net proceeds in interest-bearing
securities. In addition, we may conduct concurrent or other financings at any
time.
On July 12, 2019, the Company closed a follow-on public offering
of 7,762,500 shares of common stock at a public offering price of $61.00 per
share, less the underwriters' discount. The Company received net proceeds of
approximately $458.5 million after deducting underwriting discounts and
commissions of approximately $14.1 million and other offering expenses payable
by the Company of approximately $0.9 million.
In connection with the closing of the Acquisition on August 30, 2019, the
Company entered into a new $1.60 billion credit agreement, consisting of (i) a
five-year senior secured term loan A facility in the aggregate principal amount
of $1.25 billion, the net proceeds of which were used by the Company to finance
the Acquisition and related transactions, and (ii) a five-year senior secured
revolving credit facility in an aggregate principal amount of up to
$350.0 million, which may be used for working capital and general corporate
purposes, including the financing of acquisitions and other investments. For a
description of the terms of the credit agreement, refer to Note 8-Indebtedness.
We were in compliance with all covenants under the credit agreement as of
January 31, 2020.
Use of cash
From February 1, 2019 to April 4, 2019, we acquired approximately 1.6 million
shares of common stock of WageWorks for $53.8 million in open market purchases.
On August 30, 2019, the Acquisition closed and we paid approximately $2.0
billion in cash to WageWorks stockholders, which was funded with net borrowings
of approximately $1.22 billion, after deducting lender fees of approximately
$30.5 million, under the above term loan, and $816.9 million of cash on hand.
Capital expenditures for the years ended January 31, 2020 and 2019 were $32.9
million and $13.8 million, respectively. We expect to continue our increased
capital expenditures during the year ending January 31, 2021 as we continue to
devote a significant amount of our capital expenditures to improving the
architecture and functionality of our proprietary systems. Costs to improve the
architecture of our proprietary systems include computer hardware, personnel and
related costs for software engineering and outsourced software engineering
services. In addition, as a result of the Acquisition and Company growth, we
plan to devote further resources to leasehold improvements and furniture and
fixtures for our office space.
We believe our existing cash, cash equivalents, and revolving credit facility
will be sufficient to meet our operating and capital expenditure requirements
for at least the next 12 months. To the extent these current and anticipated
future sources of liquidity are insufficient to fund our future business
activities and requirements, we may need to raise additional funds through
public or private equity or debt financing. In the event that additional
financing is required, we may not be able to raise it on favorable terms, if at
all.
The following table shows our cash flows from operating activities, investing
activities, and financing activities for the stated periods:
                                                                  Year ended January 31,
(in thousands)                                                      2020    

2019

Net cash provided by operating activities                $    105,010       $ 113,422
Net cash provided by (used in) investing activities      $ (1,740,494)      $  25,652
Net cash provided by financing activities                $  1,465,735       $  22,929
Increase (decrease) in cash and cash equivalents             (169,749)      

162,003

Beginning cash and cash equivalents                           361,475       

199,472

Ending cash and cash equivalents                         $    191,726

$ 361,475

Cash flows provided by operating activities. Net cash provided by operating
activities during the year ended January 31, 2020 resulted from net income of
$39.7 million, plus depreciation and amortization expense of $55.4 million and
stock-based compensation expense of $39.8 million, offset by gains on marketable
equity securities of $27.8 million and other non-cash items and working capital
changes totaling $2.1 million.
Net cash provided by operating activities during the year ended January 31, 2019
resulted from net income of $73.9 million, plus depreciation and amortization
expense of $18.2 million, stock-based compensation expense of $21.1 million, and
other non-cash items and working capital changes totaling $0.2 million.
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Cash flows provided by and used in investing activities. Net cash used in
investing activities during the year ended January 31, 2020 was primarily the
result of the Acquisition of WageWorks for $1.64 billion, net of cash acquired,
and purchases of marketable equity securities of $53.8 million. We also
continued development of our proprietary systems and other software necessary to
support our continued account growth. Purchases of software and capitalized
software development costs for the year ended January 31, 2020 were $25.7
million compared to $10.0 million for the year ended January 31, 2019. We
continued to invest in purchases of intangible member assets, using $9.1 million
for portfolio purchases during the year ended January 31, 2020, compared to $1.2
million for the year ended January 31, 2019. Our purchases of property and
equipment were $7.3 million for the year ended January 31, 2020, compared to
$3.9 million during the year ended January 31, 2019.
Cash flows provided by financing activities. Cash flow provided by financing
activities during the year ended January 31, 2020 resulted primarily from net
borrowings of $1.22 billion, our follow-on offering where we received net
proceeds of $458.5 million from the sale of 7,762,500 shares of our common
stock, and the exercise of stock options of $11.3 million, offset by
$7.8 million of principal payments on our long-term debt and $215.8 million of
cash used to settle Client-held funds obligations. Cash flows provided by
financing activities during the year ended January 31, 2019 resulted from
proceeds associated with the exercise of stock options of $22.9 million.
Contractual obligations
We lease office space, data storage facilities, and other leases, as well as
contractual commitments related to network infrastructure and certain
maintenance requirements under long-term non-cancelable operating leases. Future
minimum lease payments and other contractual payments required under
non-cancelable obligations as of January 31, 2020 are as follows:
                                                                  Payments due by fiscal year
(in thousands)                            2021          2022-2023            2024-2025         Thereafter                Total
Long-term debt obligations (1)    $  39,063          $ 132,813          $ 1,070,313          $       -          $ 1,242,189
Interest on long-term debt
obligations (2)                      45,658             84,986               58,730                  -              189,374
Operating lease obligations (3)      13,064             35,456               32,023             99,530              180,073
Other contractual obligations (4)    21,912             26,629                1,648                  -               50,189
Total                             $ 119,697          $ 279,884          $ 1,162,714          $  99,530          $ 1,661,825


(1) As of January 31, 2020, our outstanding principal of $1.24 billion is
presented net of debt issuance costs on our consolidated balance sheets. The
debt issuance costs are not included in the table above. The debt maturity date
is August 31, 2024.
(2) Estimated interest payments assume the stated interest rate applicable as
of January 31, 2020 of 3.65% per annum on a $1.24 billion outstanding principal
amount.
(3) We lease office space, data storage facilities, and other leases under
non-cancelable operating leases expiring at various dates through 2031.
(4) Other contractual obligations consist of processing services agreements,
telephony services, immaterial capital leases, and other contractual
commitments.
Off-balance sheet arrangements
As of January 31, 2020, other than outstanding letters of credit issued under
our Revolving Credit Facility, we do not have any off-balance sheet
arrangements. The majority of the standby letters of credit expire within one
year. However, in the ordinary course of business, we will continue to renew or
modify the terms of the letters of credit to support business requirements. The
letters of credit are contingent liabilities, supported by our revolving credit
facility, and are not reflected on our consolidated balance sheets.
Critical accounting policies and significant management estimates
Our consolidated financial statements are prepared in accordance with GAAP. The
preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses and related disclosures. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. In many instances, we could
have reasonably used different accounting estimates, and in other instances,
changes in the accounting estimates are reasonably likely to occur from period
to period. Accordingly, actual results could differ significantly from the
estimates made by our management. To the extent that there are material
differences between these estimates and actual results, our future financial
statement presentation, financial condition, results of operations and cash
flows will be affected.
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In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application, while in other cases, management's judgment is required in
selecting among available alternative accounting standards that allow different
accounting treatment for similar transactions. We believe that there are several
accounting policies that are critical to understanding our business and
prospects for future performance, as these policies affect the reported amounts
of revenue and other significant areas that involve management's judgment and
estimates. These significant policies and our procedures related to these
policies are described in detail below.
Costs to obtain a contract
We recognize an asset for the incremental costs of obtaining a contract with a
customer, such as sales commissions, when we expect the benefit of those costs
to be recoverable. Total capitalized costs to obtain a contract with a customer
are included in Other current assets and Other assets on our consolidated
balance sheets. We apply the practical expedient to recognize incremental costs
of obtaining contracts as an expense when incurred if the amortization period
would have been one year or less.
We applied a portfolio approach based on product or service type to determine
the amortization period for the sales commissions contract costs. The
capitalized costs will be amortized over a period consistent with the transfer
to the customer of the products or services to which the asset relates. The
estimated lives have been determined by taking into consideration the type of
product or service sold, the estimated customer relationship period based on our
historical experience, and industry data. Amortization of capitalized sales
commission contract costs is included in sales and marketing expenses in the
consolidated statement of operations and comprehensive income. We review the
assets for impairment whenever events or circumstances indicate that the
associated carrying amount may not be recoverable.
Capitalized software development costs
We account for the costs of computer software developed or obtained for internal
use in accordance with Accounting Standards Codification, or ASC, 350-40,
"Internal-Use Software." Costs incurred during operation and post-implementation
stages are charged to expense. Costs incurred that are directly attributable to
developing or obtaining software for internal use incurred in the application
development stage are capitalized. Management's judgment is required in
determining the point when various projects enter the stages at which costs may
be capitalized, in assessing the ongoing value of the capitalized costs and in
determining the estimated useful lives over which the costs are amortized.
Valuation of Long-lived Assets including Goodwill, Intangible Assets and
Estimated Useful Lives
We allocate the fair value of purchase consideration to the tangible assets
acquired, liabilities assumed, and intangible assets acquired based on their
estimated fair values. The excess of the fair value of purchase consideration
over the fair values of these identifiable assets and liabilities is recorded as
goodwill. Such valuations require management to make significant estimates and
assumptions, especially with respect to intangible assets. Significant estimates
in valuing certain intangible assets include, but are not limited to, future
expected cash flows from acquired users, acquired technology, and trade names
from a market participant perspective, useful lives, and discount rates.
Management's estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. Allocation of purchase
consideration to identifiable assets and liabilities affects our amortization
expense, as acquired finite-lived intangible assets are amortized over the
useful life, whereas any indefinite lived intangible assets, including goodwill,
are not amortized. During the measurement period, which is not to exceed one
year from the acquisition date, we may record adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill. Upon the
conclusion of the measurement period, any subsequent adjustments are recorded to
earnings.
We review goodwill for impairment at least annually or more frequently if events
or changes in circumstances would more likely than not reduce the fair value of
our single reporting unit below its carrying value. As of January 31, 2020, no
impairment of goodwill has been identified.
Long-lived assets, including property and equipment and intangible assets are
reviewed for possible impairment whenever events or circumstances indicate that
the carrying amount of such assets may not be recoverable. The evaluation is
performed at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. Recoverability of
these assets is measured by a comparison of the carrying amounts to the future
undiscounted cash flows the assets are expected to generate from the use and
eventual disposition. If such review indicates that the carrying amount of
property and equipment and intangible assets is not
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recoverable, the carrying amount of such assets is reduced to fair value. We
have not recorded any significant impairment charges during the years presented.
The useful lives of our long-lived assets including property and equipment and
finite-lived intangible assets are determined by management when those assets
are initially recognized and are routinely reviewed for the remaining estimated
useful lives. The current estimate of useful lives represents our best estimate
based on current facts and circumstances, but may differ from the actual useful
lives due to changes in future circumstances such as changes to our business
operations, changes in the planned use of assets, and technological
advancements. When we change the estimated useful life assumption for any asset,
the remaining carrying amount of the asset is accounted for prospectively and
depreciated or amortized over the revised estimated useful life. Historically
changes in useful lives have not resulted in material changes to our
depreciation and amortization expense.
Income taxes
We account for income taxes and the related accounts under the liability method
as set forth in the authoritative guidance for accounting for income taxes.
Under this method, current tax liabilities and assets are recognized for the
estimated taxes payable or refundable on the tax returns for the current fiscal
year. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, for net operating losses, and for tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted statutory tax rates expected
to apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and
liabilities of changes in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided for when it is
more likely than not that some or all of the deferred tax assets may not be
realized in future years.
We use the tax law ordering approach of intraperiod allocation in determining
when excess tax benefits have been realized for provisions of the tax law that
identify the sequence in which those amounts are utilized for tax purposes. We
have also elected to exclude the indirect tax effects of share-based
compensation deductions in computing the income tax provision recorded within
the consolidated statement of operations and comprehensive income. Also, we use
the portfolio approach in releasing income tax effects from accumulated other
comprehensive income.
We recognize the tax benefit from an uncertain tax position taken or expected to
be taken in a tax return using a two-step approach. The first step is to
evaluate the tax position taken or expected to be taken in a tax return by
determining if the weight of available evidence indicates that it is more likely
than not that the tax position will be sustained upon examination by the
relevant taxing authorities, based on the technical merits of the position. For
tax positions that are more likely than not to be sustained upon audit, the
second step is to measure the tax benefit in the financial statements as the
largest benefit that has a greater than 50% likelihood of being sustained upon
settlement. We recognize interest and penalties, if any, related to unrecognized
tax benefits as a component of other income (expense) in the consolidated
statements of operations and comprehensive income. Changes in facts and
circumstances could have a material impact on our effective tax rate and results
of operations.
Recent accounting pronouncements
See Note 1. Summary of business and significant accounting policies within the
financial statements included in this Form 10-K for further discussion.
Item 7A. Quantitative and qualitative disclosures about market risk
Market risk
Concentration of market risk. We derive a substantial portion of our revenue
from providing services to tax-advantaged healthcare account holders. A
significant downturn in this market or changes in state and/or federal laws
impacting the preferential tax treatment of healthcare accounts such as HSAs
could have a material adverse effect on our results of operations. During the
years ended January 31, 2020, 2019, and 2018, no one customer accounted for
greater than 10% of our total revenue. We monitor market and regulatory changes
regularly and make adjustments to our business if necessary.
Inflation. Inflationary factors may adversely affect our operating results.
Although we do not believe that inflation has had a material impact on our
financial position or results of operations to date, a high rate of inflation in
the future may have an adverse effect on our ability to maintain current levels
of expenses as a percentage of revenue if our revenue does not correspondingly
increase with inflation.

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Concentration of credit risk
Financial instruments, which potentially subject us to concentrations of credit
risk, consist primarily of cash and cash equivalents. We maintain our cash and
cash equivalents in bank and other depository accounts, which frequently may
exceed federally insured limits. Our cash and cash equivalents as of January 31,
2020 were $191.7 million, of which $2.3 million was covered by federal
depository insurance. We have not experienced any material losses in such
accounts and believe we are not exposed to any significant credit risk with
respect to our cash and cash equivalents. Our accounts receivable balance as of
January 31, 2020 was $70.9 million. We have not experienced any significant
write-offs to our accounts receivable and believe that we are not exposed to
significant credit risk with respect to our accounts receivable. We continue to
monitor our credit risk and place our cash and cash equivalents with reputable
financial institutions.
Interest rate risk
HSA Assets and Client-held funds. Our HSA Assets consists of custodial HSA funds
we hold in custody on behalf of our members. As of January 31, 2020, we had HSA
Assets of approximately $11.5 billion. As a non-bank custodian, we contract with
our Depository Partners and an insurance company partner to hold custodial cash
assets on behalf of our members, and we earn a significant portion of our total
revenue from interest paid to us by these partners. The contract terms generally
range from three to five years and have either fixed or variable interest rates.
As our HSA Assets increase and existing agreements expire, we seek to enter into
new contracts with Depository Partners, the terms of which are impacted by the
then-prevailing interest rate environment. The diversification of deposits among
Depository Partners and varied contract terms substantially reduces our exposure
to short-term fluctuations in prevailing interest rates and mitigates the
short-term impact of a sustained increase or decline in prevailing interest
rates on our custodial revenue. A sustained decline in prevailing interest rates
may negatively affect our business by reducing the size of the interest rate
yield, or yield, available to us and thus the amount of the custodial revenue we
can realize. Conversely, a sustained increase in prevailing interest rates can
increase our yield. An increase in our yield would increase our custodial
revenue as a percentage of total revenue. In addition, as our yield increases,
we expect the spread to grow between the interest offered to us by our
Depository Partners and the interest retained by our members, thus increasing
our profitability. However, we may be required to increase the interest retained
by our members in a rising prevailing interest rate environment. Changes in
prevailing interest rates are driven by macroeconomic trends and government
policies over which we have no control.
Our Client-held funds are interest earning deposits from which we generate
custodial revenue. As of January 31, 2020, we had Client-held funds of
approximately $779.0 million. These deposits are amounts remitted by Clients and
held by us on their behalf to pre-fund and facilitate administration of our
other CDBs. These deposits are held with Depository Partners. We deposit the
Client-held funds with our Depository Partners in interest-bearing, demand
deposit accounts that have a floating interest rate and no set term or duration.
A sustained decline in prevailing interest rates may negatively affect our
business by reducing the size of the interest rate yield, or yield, available to
us and thus the amount of the custodial revenue we can realize from Client-held
funds. Changes in prevailing interest rates are driven by macroeconomic trends
and government policies over which we have no control.
Cash and cash equivalents. We consider all highly liquid investments purchased
with an original maturity of three months or less to be unrestricted cash
equivalents. Our unrestricted cash and cash equivalents are held in institutions
in the U.S. and include deposits in a money market account that is unrestricted
as to withdrawal or use. As of January 31, 2020, we had unrestricted cash and
cash equivalents of $191.7 million. Due to the short-term nature of these
instruments, we believe that we do not have any material exposure to changes in
the fair value of our cash and cash equivalents as a result of changes in
interest rates.
Credit agreement. At January 31, 2020, we had $1.24 billion outstanding under
our term loan facility and no amounts drawn under our Revolving Credit
Facility.  Our overall interest rate sensitivity under these credit facilities
is primarily influenced by any amounts borrowed and the prevailing interest
rates on these instruments.  The interest rate on our Term Loan Credit Facility
and Revolving Credit Facility is variable and was 3.65 percent at January 31,
2020.  Accordingly, we may incur additional expense if interest rates increase
in future periods.  For example, a one percent increase in the interest rate on
the amount outstanding under our credit facilities at January 31, 2020 would
result in approximately $12.5 million of additional interest expense over the
next 12 months.
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Item 8. Financial statements and Supplementary Data

HealthEquity, Inc. and subsidiaries
Index to consolidated financial statements
                                                                                          Page
  Report of Independent Registered Public Accounting Firm                                 51
  Consolidated Balance Sheets as of January 31, 2020 and 2019                             54

Consolidated Statements of Operations and Comprehensive Income for the years ended January 31, 2020, 2019 and 2018

                                                     55

Consolidated Statements of Stockholders' Equity for the years ended January 31, 2020, 2019 and 2018

                                                                       56

Consolidated Statements of Cash Flows for the years ended January 31, 2020, 2019 and 2018

              57
  Notes to consolidated financial statements                                              59



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            Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of HealthEquity, Inc.
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of HealthEquity,
Inc. and its subsidiaries (the "Company") as of January 31, 2020 and 2019, and
the related consolidated statements of operations and comprehensive income, of
stockholders' equity and of cash flows for each of the three years in the period
ended January 31, 2020, including the related notes (collectively referred to as
the "consolidated financial statements"). We also have audited the Company's
internal control over financial reporting as of January 31, 2020, based on
criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
January 31, 2020 and 2019, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 2020 in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of January 31, 2020, based on
criteria established in Internal Control - Integrated Framework (2013) issued by
the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for leases in the year ended January 31,
2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's report on internal control over financial
reporting appearing under Item 9A. Our responsibility is to express opinions on
the Company's consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As described in Management's report on internal control over financial
reporting, management has excluded WageWorks, Inc. from its assessment of
internal control over financial reporting as of January 31, 2020, because it was
acquired by the Company in a purchase business combination during the year ended
January 31, 2020. We have also excluded WageWorks, Inc. from our audit of
internal control over financial reporting. WageWorks, Inc. is a wholly-owned
subsidiary whose total assets, excluding the effects of purchase accounting, and
total revenues excluded from management's assessment and our audit of internal
control over financial reporting represent approximately 11% and 35%,
respectively, of the related consolidated financial statement amounts as of and
for the year ended January 31, 2020.

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Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (i)
relate to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Valuation of Intangible Assets Acquired in the WageWorks, Inc. Acquisition
As described in Note 3 to the consolidated financial statements, on August 30,
2019, the Company closed the acquisition of WageWorks, Inc. for $51.35 per share
in cash, or approximately $2.0 billion to WageWorks, Inc. stockholders. The
acquisition resulted in $1.3 billion of goodwill and $711.5 million of
intangible assets being recorded. The intangible assets were comprised of
customer relationships of $598.5 million, developed technology of $96.9 million,
trade names and trademarks of $12.3 million and in-process software development
costs of $3.8 million. The Company preliminarily valued the acquired assets
utilizing the discounted cash flow method, a form of the income approach. The
significant assumptions used in the discounted cash flow analyses include future
revenue growth and attrition rates, projected margins, royalty rates,
technological obsolescence, discount rates used to present value future cash
flows, and the amount of revenue and cost synergies expected from the
acquisition.
The principal considerations for our determination that performing procedures
relating to the valuation of intangible assets acquired in the acquisition of
WageWorks, Inc. is a critical audit matter are (i) there was a high degree of
auditor judgment and subjectivity in applying procedures relating to the fair
value measurement of the customer relationships, developed technology, and trade
names and trademarks intangible assets acquired due to the significant judgment
required by management when developing the estimate; (ii) significant audit
effort was required in evaluating the significant assumptions relating to the
valuation of the aforementioned intangible assets, which included the future
revenue growth and discount rates for all the aforementioned intangible assets,
royalty rates for the developed technology and trade names and trademarks
intangible assets, attrition rates for the customer relationships intangible
asset, and technological obsolescence for the developed technology intangible
asset; and (iii) the audit effort involved the use of professionals with
specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit
evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of
controls relating to the acquisition accounting, including controls over
management's valuation of intangible assets and controls over development of
significant assumptions related to the valuation of intangible assets, including
future revenue growth and attrition rates, royalty rates, technological
obsolescence, and discount rates. These procedures also included, among others,
(i) reading the purchase agreement; (ii) testing management's process for
estimating the fair value of intangible assets; and (iii) evaluating the
appropriateness of the discounted cash flow methods, testing the completeness
and accuracy of the underlying data, and evaluating the reasonableness of
significant assumptions, including the future revenue growth and attrition
rates, royalty rates, technological obsolescence, and discount rates. Evaluating
the reasonableness of the future revenue growth and attrition rates,
technological obsolescence, and attrition rates involved considering the past
performance of the acquired business,
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as well as economic and industry forecasts. The discount rates were evaluated by
considering the cost of capital of comparable businesses and other industry
factors. Professionals with specialized skill and knowledge were used to assist
in the evaluation of the methods and certain significant management assumptions,
including technology obsolescence, royalty rates, and discount rates.
Determination of the Useful Life of Acquired Customer Relationships in the
WageWorks, Inc. Acquisition
As described in Notes 1 and 3 to the consolidated financial statements, on
August 30, 2019, the Company closed the acquisition of WageWorks, Inc. for
$51.35 per share in cash, or approximately $2.0 billion to WageWorks, Inc.
stockholders. As part of the transaction, the Company recorded a customer
relationships intangible asset of $598.5 million. The useful life of the
acquired customer relationships intangible asset was estimated based on future
revenue growth and attrition.
The principal considerations for our determination that performing procedures
relating to the determination of the useful life of the acquired customer
relationships intangible asset in the WageWorks, Inc. acquisition is a critical
audit matter are (i) there was a high degree of auditor judgment and
subjectivity in applying procedures relating to the useful life estimate due to
the significant judgment required by management when developing the estimate;
and (ii) significant audit effort was required in evaluating the significant
assumptions relating to the useful life estimate, which included the future
revenue growth and attrition.
Addressing the matter involved performing procedures and evaluating audit
evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of
controls relating to the determination of the useful life of the acquired
customer relationships, including controls over the development of significant
assumptions relating to the useful life estimate, including future revenue
growth and attrition. These procedures also included, among others (i) testing
management's process for developing the estimate of the useful life of acquired
customer relationships; (ii) testing the completeness, accuracy, and relevance
of underlying data used in the estimate; and (iii) evaluating the significant
assumptions used by management, including the future revenue growth and
attrition. Evaluating the reasonableness of the future revenue growth and
attrition involved considering the past performance of the acquired business, as
well as economic and industry forecasts, and the consistency with other evidence
obtained throughout the audit.


/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 31, 2020
We have served as the Company's auditor since 2013.



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HealthEquity, Inc. and subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)                                  January 31, 2020         January 31, 2019
Assets
Current assets
Cash and cash equivalents                                      $        

191,726 $ 361,475 Accounts receivable, net of allowance for doubtful accounts of $1,216 and $125 as of January 31, 2020 and 2019, respectively

            70,863                   25,668
Other current assets                                                     34,711                    7,534
Total current assets                                                    297,300                  394,677
Property and equipment, net                                              33,486                    8,223
Operating lease right-of-use assets                                      83,178                        -
Intangible assets, net                                                  783,279                   79,666
Goodwill                                                              1,332,631                    4,651
Deferred tax asset                                                           18                    1,677
Other assets                                                             35,089                   21,122
Total assets                                                   $      2,564,981          $       510,016
Liabilities and stockholders' equity
Current liabilities
Accounts payable                                               $          3,980          $         3,520
Accrued compensation                                                     50,121                   16,981
Accrued liabilities                                                      46,372                    8,552
Current portion of long-term debt                                        39,063                        -
Operating lease liabilities                                              12,401                        -
Total current liabilities                                               151,937                   29,053
Long-term liabilities
Long-term debt, net of issuance costs                                 1,181,615                        -
Operating lease liabilities, non-current                                 68,017                        -
Other long-term liabilities                                               2,625                    2,968
Deferred tax liability                                                  130,492                      916
Total long-term liabilities                                           1,382,749                    3,884
Total liabilities                                                     1,534,686                   32,937
Commitments and contingencies (see Note 7)
Stockholders' equity
Preferred stock, $0.0001 par value, 100,000 shares authorized,
no shares issued and outstanding as of January 31, 2020 and
2019                                                                          -                        -

Common stock, $0.0001 par value, 900,000 shares authorized, 71,051 and 62,446 shares issued and outstanding as of January 31, 2020 and 2019, respectively

                                               7                        6
Additional paid-in capital                                              818,774                  305,223
Accumulated earnings                                                    211,514                  171,850
Total stockholders' equity                                            1,030,295                  477,079
Total liabilities and stockholders' equity                     $      

2,564,981 $ 510,016

The accompanying notes are an integral part of the consolidated financial statements.

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HealthEquity, Inc. and subsidiaries
Consolidated Statements of Operations and Comprehensive Income
                                                                                       Year ended January 31,
(in thousands, except per share data)                          2020                 2019                 2018

Revenue

  Service revenue                                    $   262,868          $ 

100,564 $ 91,619

  Custodial revenue                                      181,892              126,178               87,160
  Interchange revenue                                     87,233               60,501               50,746
  Total revenue                                          531,993              287,243              229,525
 Cost of revenue
  Service costs                                          170,863               76,858               70,426
  Custodial costs                                         17,563               14,124               11,400
  Interchange costs                                       17,658               15,068               12,783
  Total cost of revenue                                  206,084              106,050               94,609
 Gross profit                                            325,909              181,193              134,916
 Operating expenses
  Sales and marketing                                     43,951               29,498               23,139
  Technology and development                              77,576               35,057               27,385
  General and administrative                              60,561               33,039               25,111
  Amortization of acquired intangible assets              34,704                5,929                4,863
Merger integration                                        32,111                    -                    -
  Total operating expenses                               248,903              103,523               80,498
 Income from operations                                   77,006               77,670               54,418
 Other expense
Interest expense                                         (24,772)                (270)                (274)
  Other expense, net                                      (9,079)              (1,582)              (1,955)
 Total other expense                                     (33,851)              (1,852)              (2,229)
 Income before income taxes                               43,155               75,818               52,189
 Income tax provision                                      3,491                1,919                4,827
 Net income                                          $    39,664          $    73,899          $    47,362
Net income per share:
 Basic                                               $      0.59          $      1.20          $      0.79
 Diluted                                             $      0.58          $      1.17          $      0.77
Weighted-average number of shares used in computing
net income per share:
 Basic                                                    67,026               61,836               60,304
 Diluted                                                  68,453               63,370               61,854
Comprehensive income:
Net income                                           $    39,664          $    73,899          $    47,362
Other comprehensive loss:
Unrealized loss on available-for-sale marketable
securities, net of tax                                         -                    -                  (59)
Comprehensive income                                 $    39,664          $    73,899          $    47,303

The accompanying notes are an integral part of the consolidated financial statements.

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HealthEquity, Inc. and subsidiaries
Consolidated Statements of Stockholders' Equity

                                                       Common stock                 Additional   Accumulated                             Total
                                                                                       paid-in       compre-     Accumulated     stockholders'
(in thousands)                                   Shares      Amount                    capital  hensive loss        earnings            equity
Balance as of January 31, 2017                59,538    $      6    $ 232,114    $     (165)   $   29,985    $    261,940
Issuance of common stock:
Issuance of common stock upon exercise
of options and for restricted stock
units                                          1,287           -       14,564             -             -          14,564
Stock-based compensation                           -           -       14,310             -             -          14,310
Cumulative effect from adoption of ASU
2016-09                                            -           -          249             -         7,908           8,157
Adoption of ASU 2018-02                            -           -            -           (45)           45               -
Other comprehensive loss, net of tax               -           -            -           (59)            -             (59)
Net income                                         -           -            -             -        47,362          47,362
Balance as of January 31, 2018                60,825    $      6    $ 261,237    $     (269)   $   85,300    $    346,274
Issuance of common stock:
Issuance of common stock upon exercise
of options and for restricted stock
units                                          1,621           -       22,929             -             -          22,929
Stock-based compensation                           -           -       21,057             -             -          21,057
Cumulative effect from adoption of ASC
606                                                -           -            -             -        13,007          13,007
Cumulative effect from adoption of ASU
2016-01                                            -           -            -           269          (356)            (87)
Net income                                         -           -            -             -        73,899          73,899
Balance as of January 31, 2019                62,446    $      6    $ 305,223    $        -    $  171,850    $    477,079
Issuance of common stock:
Issuance of common stock upon exercise
of options and for restricted stock
units                                            842           -       11,438             -             -          11,438
Other issuance of common stock                 7,763           1      462,269             -             -         462,270
Stock-based compensation                           -           -       39,844             -             -          39,844
Net income                                         -           -            -             -        39,664          39,664
Balance as of January 31, 2020                71,051    $      7    $ 

818,774 $ - $ 211,514 $ 1,030,295

The accompanying notes are an integral part of the consolidated financial statements.

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HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows
                                                                                          Year ended January 31,
(in thousands)                                                        2020               2019               2018

Cash flows from operating activities:

 Net income                                                $     39,664

$ 73,899 $ 47,362

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization

                                    55,352             18,185             15,952
Stock-based compensation                                         39,844             21,057             14,310

(Gains) losses on marketable equity securities and other (23,151)

          1,173                597
Deferred taxes                                                    3,665                408              4,306
 Changes in operating assets and liabilities:
Accounts receivable                                              (5,009)            (4,306)            (4,734)
Other assets                                                    (12,577)            (5,893)              (760)
Operating lease right-of-use assets                               6,218                  -                  -
Accounts payable                                                 (3,839)               863               (581)
Accrued compensation                                              4,550              4,432              3,827
Accrued liabilities and other current liabilities                 5,759              3,031                484
Operating lease liabilities, non-current                         (5,383)                 -                  -
Other long-term liabilities                                         (83)               573                939
 Net cash provided by operating activities                      105,010            113,422             81,702
 Cash flows from investing activities:
Acquisitions, net of cash acquired                           (1,644,575)                 -             (2,882)
Purchases of marketable securities                              (53,845)              (728)              (483)
Purchases of property and equipment                              (7,286)            (3,869)            (5,458)

Purchases of software and capitalized software development costs

                                                           (25,654)            (9,978)           (10,380)
Acquisition of intangible member assets                          (9,134)            (1,195)           (17,545)
Proceeds from sale of marketable securities                           -             41,422                  -

Net cash provided by (used in) investing activities (1,740,494)

         25,652            (36,748)
 Cash flows from financing activities:
Proceeds from long-term debt                                  1,250,000                  -                  -
Payment of debt issuance costs                                  (30,504)                 -                  -
Principal payments on long-term debt                             (7,813)                 -                  -
Settlement of client-held funds obligation                     (215,790)                 -                  -

Proceeds from follow-on offering, net of payments for offering costs

                                                  458,495                  -                  -
Proceeds from exercise of common stock options                   11,347             22,929             14,564
 Net cash provided by financing activities                    1,465,735             22,929             14,564
 Increase (decrease) in cash and cash equivalents              (169,749)           162,003             59,518
 Beginning cash and cash equivalents                            361,475            199,472            139,954
 Ending cash and cash equivalents                          $    191,726

$ 361,475 $ 199,472

The accompanying notes are an integral part of the consolidated financial statements.

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HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows (continued)
                                                                                      Year ended January 31,
(in thousands)                                                     2020              2019               2018

Supplemental cash flow data:
Interest expense paid in cash                              $  21,806          $    203          $     203
Income taxes paid in cash, net of refunds received             9,277               587                 27

Supplemental disclosures of non-cash investing and financing activities: Acquisition of intangible member assets accrued at period end

                                                                -                 -              1,409
Equity-based acquisition consideration                         3,776                 -                  -

Purchases of property and equipment included in accounts payable or accrued liabilities at period end

                     487                37                  -

Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end

                                                  1,742               200                  3

The accompanying notes are an integral part of the consolidated financial statements.

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HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies
Business
HealthEquity, Inc. was incorporated in the state of Delaware on September 18,
2002. HealthEquity, Inc. is a leader in administering health savings accounts
("HSAs") and complementary consumer-directed benefits ("CDBs"), which empower
consumers to access tax-advantaged healthcare savings while also providing
corporate tax advantages for employers.
In February 2006, HealthEquity, Inc. received designation by the U.S. Department
of Treasury to act as a passive non-bank custodian, which allows HealthEquity,
Inc. to hold custodial assets for individual account holders.  On July 24, 2017,
HealthEquity, Inc. received designation by the U.S. Department of Treasury to
act as both a passive and non-passive non-bank custodian, which allows
HealthEquity, Inc. to hold custodial assets for individual account holders and
use discretion to direct investment of such assets held. As a passive and
non-passive non-bank custodian according to Treasury Regulations section
1.408-2(e)(5)(ii)(B), the Company must maintain net worth (assets minus
liabilities) greater than the sum of 2% of passive custodial funds held at each
calendar year-end and 4% of the non-passive custodial funds held at each
calendar year-end in order to take on additional custodial assets.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, or
GAAP. The financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the
United States and have been consistently applied in the preparation of the
consolidated financial statements, except for the new accounting pronouncements
adopted during the year ended January 31, 2020, as described below.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
Acquisition of WageWorks, Inc.
On August 30, 2019, HealthEquity, Inc. closed the acquisition of WageWorks, Inc.
("WageWorks"), pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"), for $51.35 per share in cash, or approximately $2.0 billion to
WageWorks stockholders (the "Acquisition").
As a result of the Acquisition, HealthEquity, Inc. gained access to more of the
HSA market by expanding its direct distribution to employers and benefits
advisors as a single source provider of HSAs and other CDBs, including flexible
spending accounts, health reimbursement arrangements, COBRA administration,
commuter and other benefits.
Principles of consolidation
The consolidated financial statements include the accounts of HealthEquity,
Inc., and its direct and indirect subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Segments
The Company operates in one segment. Management uses one measurement of
profitability and does not segregate its business for internal reporting. All
long-lived assets are maintained in the United States of America.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company's cash and
cash equivalents were held in institutions in the U.S. and include deposits in a
money market account that was unrestricted as to withdrawal or use.
Client-held funds
Many of the Company's client services agreements with employers (referred to as
"Clients") provide that Clients remit funds to the Company to pre-fund Client
and employee participant contributions related to flexible spending accounts and
health reimbursement arrangements ("FSAs" and "HRAs", respectively) and commuter
accounts. These Client-held funds remitted to the Company do not represent cash
assets of the Company to the extent that
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they are not combined with corporate cash, and accordingly are not included in
cash and cash equivalents on the Company's consolidated balance sheets.
Prior to the closing of the Acquisition, Wageworks included all Client-held
funds with its corporate cash assets on its balance sheet, with an offsetting
Client-held funds obligation. As of the closing of the Acquisition on August 30,
2019, WageWorks held approximately $682 million of Client-held funds, of which
$220 million was combined with its corporate cash within WageWorks' corporate
bank accounts; therefore, the Company determined that this $220 million of
Client-held funds were assets of the Company, while the approximately
$462 million of remaining Client-held funds were not assets of the Company. As
of January 31, 2020, $4 million of Client-held funds remained combined within
the Company's corporate bank accounts and therefore remained on the Company's
consolidated balance sheets in cash and cash equivalents, with an offsetting
liability included in accrued liabilities.
Accounts receivable
Accounts receivable represent monies due to the Company for monthly service
revenue, custodial revenue and interchange revenue. The Company maintains an
allowance for doubtful accounts to reserve for potentially uncollectible
receivable amounts. In evaluating the Company's ability to collect outstanding
receivable balances, the Company considers various factors including the age of
the balance, the creditworthiness of the customer, which is assessed based on
ongoing credit evaluations and payment history, and the customer's current
financial condition. As of January 31, 2020 and 2019, the Company had allowance
for doubtful accounts of $1.2 million and $0.1 million, respectively. During the
years ended January 31, 2020 and 2019, the Company recorded credit losses from
trade receivables of $1.0 million and $0.2 million, respectively.
Investments
Marketable equity securities are strategic equity investments with readily
determinable fair values for which the Company does not have the ability to
exercise significant influence. These securities are accounted for at fair value
and were classified as investments on the consolidated balance sheets. All gains
and losses on these investments, realized and unrealized, are recognized in
other expense, net in the consolidated statements of operations and
comprehensive income. As a result of the Acquisition on August 30, 2019, the
Company's marketable equity security investment in WageWorks was canceled.
Non-marketable equity securities are strategic equity investments without
readily determinable fair values for which the Company does not have the ability
to exercise significant influence. These securities are accounted for using the
measurement alternative and are classified as other assets on the consolidated
balance sheets. All gains and losses on these investments, realized and
unrealized, are recognized in other expense, net on the consolidated statements
of operations and comprehensive income.
Equity method investments are equity securities in investees the Company does
not control but over which the Company has the ability to exercise significant
influence. Equity method investments are included in other assets on the
consolidated balance sheets. The Company's share of the earnings or losses as
reported by equity method investees, amortization of basis differences, and
related gains or losses, if any, are recognized in other expense, net on the
consolidated statements of operations and comprehensive income.
The Company assesses whether an other-than-temporary impairment loss on equity
method investments and an impairment loss on non-marketable equity securities
has occurred due to declines in fair value or other market conditions. If any
impairment is considered other than temporary for equity method investments or
impairment is identified for non-marketable equity securities, the Company will
write down the investment to its fair value and record the corresponding charge
through other expense, net in the consolidated statements of operations and
comprehensive income.
Other assets
Other assets consist primarily of contract costs, debt issuance costs, prepaid
expenditures, income tax receivables, inventories, and various other assets.
Amounts expected to be recouped or recognized over a period of twelve months or
less have been classified as current in the accompanying consolidated balance
sheets.
Leases
The Company determines if a contract contains a lease at inception or any
modification of the contract. A contract contains a lease if the contract
conveys the right to control the use of an identified asset for a specified
period in exchange for consideration. Control over the use of the identified
asset means the lessee has both (a) the right to obtain substantially all of the
economic benefits from the use of the asset and (b) the right to direct the use
of the asset.
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Leases with an expected term of 12 months or less at commencement are not
accounted for on the balance sheet. All operating lease expense is recognized on
a straight-line basis over the expected lease term. Certain leases also include
obligations to pay for non-lease services, such as utilities and common area
maintenance. The services are accounted for separately from lease components,
and the Company allocates payments to the lease and other services components
based on estimated stand-alone prices.
Operating lease right-of-use ("ROU") assets and liabilities are recognized based
on the present value of future minimum lease payments over the expected lease
term at commencement date. As the rate implicit in each lease is not readily
determinable, management uses the Company's incremental borrowing rate based on
the information available at commencement date in determining the present value
of future payments. The Company used its incremental borrowing rate on February
1, 2019 for all leases that commenced prior to that date.
Operating leases are included in operating lease right-of-use assets, operating
lease liabilities and operating lease liabilities, non-current on the
consolidated balance sheets beginning February 1, 2019.
Property and equipment
Property and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation. Depreciation is determined using the
straight-line method over the estimated useful lives of individual assets. The
useful life for leasehold improvements is the shorter of the estimated useful
life or the term of the lease ranging from 3-5 years. The useful life used for
computing depreciation for all other asset classes is described below:
Computer equipment         3-5 years
Furniture and fixtures       5 years


Maintenance and repairs are expensed when incurred, and improvements that extend
the economic useful life of an asset are capitalized. Gains and losses on the
disposal of property and equipment are reflected in operating expenses.
Intangible assets, net
Intangible assets are carried at cost and amortized, typically, on a
straight-line basis over their estimated useful lives. The useful life used for
computing amortization for all intangible asset classes is described below:
Software and software development costs         3 years
Acquired customer relationships             10-15 years
Acquired developed technology                 2-5 years
Acquired trade names and trademarks             3 years
Acquired HSA portfolios                        15 years


We account for the costs of computer software developed or obtained for internal
use in accordance with Accounting Standards Codification ("ASC") 350-40,
"Internal-Use Software." Costs incurred during operation and post-implementation
stages are charged to expense. Costs incurred during the application development
stage that are directly attributable to developing or obtaining software for
internal use are capitalized. Management's judgment is required in determining
the point when various projects enter the stages at which costs may be
capitalized, in assessing the ongoing value of the capitalized costs and in
determining the estimated useful lives over which the costs are amortized.
Acquired customer relationships, developed technology, and trade names and trade
marks are valued utilizing the discounted cash flow method, a form of the income
approach. The useful lives of acquired customer relationships were estimated
based on future revenue growth and attrition. The useful lives of developed
technology and trade names were estimated based on expected obsolescence. The
Company expenses the assets straight-line over the useful lives, and determined
that this amortization method is appropriate to reflect the pattern over which
the economic benefits of these acquired assets are realized.
Acquired HSA portfolios consist of the contractual rights to administer the
activities related to the individual HSAs acquired. The Company used its HSA
customer relationship period assumption and the historical attrition rates of
member accounts to determine that an average useful life of 15 years and the use
of a straight-line amortization method are appropriate to reflect the pattern
over which the economic benefits of existing member assets are realized.
The Company reviews identifiable amortizable intangible assets to be held and
used for impairment whenever events or changes in circumstances indicate that
the carrying value of the assets may not be recoverable. Determination of
recoverability is based on the lowest level of identifiable estimated
undiscounted cash flows
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resulting from use of the asset and its eventual disposition. Measurement of any
impairment loss is based on the excess of the carrying value of the asset over
its fair value. During the year ended January 31, 2019, the Company incurred a
loss on disposal of approximately $0.7 million of previously capitalized
software development costs. No impairment charges were recorded during the years
ended January 31, 2020 or 2018.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net tangible and intangible assets acquired in a business combination. Goodwill
is not amortized, but is tested for impairment annually on January 31 or more
frequently if events or changes in circumstances indicate that the asset may be
impaired. The Company's impairment tests are based on a single operating segment
and reporting unit structure. The goodwill impairment test involves a
qualitative assessment to compare a reporting unit's fair value to its carrying
value. If it is determined that it is more likely than not that a reporting
unit's fair value is less than its carrying value, a quantitative comparison is
made between the Company's market capitalization and the carrying value of the
reporting unit, including goodwill. If the carrying value of the reporting unit
exceeds its fair value, an impairment charge is recognized for the excess of the
carrying value of goodwill over its implied fair value.
The Company's annual goodwill impairment test resulted in no impairment charges
in any of the periods presented in the accompanying consolidated financial
statements.
Self-insurance
The Company is self-insured for medical insurance up to certain annual stop-loss
limits. The Company establishes a liability as of the balance sheet date for
claims, both reported and incurred but not reported, using currently available
information as well as historical claims experience, and as determined by an
independent third party.
Other long-term liabilities
Other long-term liabilities consists of long-term deferred revenue and other
liabilities that the Company does not expect to settle within one year.
Revenue recognition
The Company recognizes revenue when control of the promised goods or services is
transferred to its customers, in an amount that reflects the consideration it
expects to be entitled to in exchange for those goods or services.
The Company determines revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the
contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Disaggregation of revenue. The Company's primary sources of revenue are service,
custodial, and interchange revenue and are disclosed in the consolidated
statements of operations and comprehensive income. All of the Company's sources
of revenue are deemed to be revenue contracts with customers. Each revenue
source is affected differently by economic factors as it relates to the nature,
amount, timing and uncertainty.
Costs to obtain a contract. ASC 606 requires capitalizing the costs of obtaining
a contract when those costs are expected to be recovered. As of January 31,
2020, the net amount capitalized as contract costs was $21.8 million, which is
included in other current assets and other assets. Amortization of capitalized
contract costs during the year ended January 31, 2020 was $1.9 million.
In order to determine the amortization period for sales commissions contract
costs, the Company applied the portfolio approach. Accordingly, the amortization
period of the assets has been determined to be the average economic life of an
HSA or CDB relationship, which is estimated to be 15 years and 7 years,
respectively. Amortization of capitalized sales commission contract costs is
included in sales and marketing expenses in the consolidated statements of
operations and comprehensive income.
Performance obligations. ASC 606 requires disclosure of the aggregate amount of
the transaction price allocated to unsatisfied performance obligations; however,
as permitted by ASC 606, the Company has elected to exclude from this disclosure
any contracts with an original duration of one year or less and any variable
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consideration that meets specified criteria. Amounts excluded are not
significant to the Company's consolidated statements of operations and
comprehensive income.
Service revenue. The Company hosts its platforms, prepares statements, provides
a mechanism for spending funds, and provides customer support services. All of
these services are consumed as they are received. The Company will continue to
recognize service revenue, in an amount that reflects the consideration it
expects to be entitled to in exchange for those services, on a monthly basis as
it satisfies its performance obligations.
Custodial revenue. The Company deposits HSA assets at federally insured
custodial depository partners, which we refer to as our Depository Partners, and
investment assets with an investment partner. The deposit of funds represents a
service that is simultaneously received and consumed by our Depository Partners
and investment partner. The Company will continue to recognize custodial
revenue, in an amount that reflects the consideration it expects to be entitled
to in exchange for the service, each month based on the amount received by its
custodial partners and investment partners.
Interchange revenue. The Company satisfies its interchange performance
obligation each time payments are made with its cards via payment networks. The
Company will continue to recognize interchange revenue, in an amount that
reflects the consideration it expects to be entitled to in exchange for the
service, in the month the payment transaction occurs.
Contract balances. The Company does not recognize revenue in advance of
invoicing its customers and therefore has no related contract assets. The
Company records a receivable when revenue is recognized prior to payment and the
Company has unconditional right to payment. Alternatively, when payment precedes
the related services, the Company records a contract liability, or deferred
revenue, until its performance obligations are satisfied. The Company's deferred
revenue increased from $0.4 million as of January 31, 2019 to $3.7 million as of
January 31, 2020, primarily due to the Acquisition. The balances are related to
cash received in advance for a certain interchange revenue arrangement, other
up-front fees and other commuter deferred revenue, and are generally recognized
within twelve months, with the exception of the interchange arrangement, which
is generally recognized over a five year term. Revenue recognized during the
fiscal year that was included in the beginning balance of deferred revenue was
$0.4 million. The Company expects to satisfy its remaining obligations for these
arrangements.
Significant judgments. The Company makes no significant judgments in determining
the amount or timing of revenue recognition. The Company has estimated the
average economic life of an HSA or CDB member relationship, which which has been
determined to be the amortization period for the capitalized sales commissions
contract costs.
Practical expedients. The Company has applied the practical expedient which
allows an entity to account for incremental costs of obtaining a contract at a
portfolio level. The Company has also applied the practical expedient to
recognize incremental costs of obtaining contracts as an expense when incurred
if the amortization period would have been one year or less.
Cost of revenue
The Company incurs cost of revenue related to servicing member accounts,
managing customer and partner relationships, and processing reimbursement
claims. Expenditures include personnel-related costs, depreciation,
amortization, stock-based compensation, common expense allocations, new member
and participant supplies and other operating costs of the Company's related
member account servicing departments. Other components of the Company's cost of
revenue sold include interest retained by members on custodial assets held and
interchange costs incurred in connection with processing card transactions
initiated by members.
Stock-based compensation
The Company grants stock-based awards, which consist of stock options,
restricted stock units ("RSUs") and restricted stock awards ("RSAs"), to certain
team members, executive officers, and directors. The Company recognizes
compensation expense for stock-based awards based on the grant date estimated
fair value. Expense for stock-based awards is generally recognized on a
straight-line basis over the requisite service period, and is reversed as
pre-vesting forfeitures occur. The fair value of stock options is determined
using the Black-Scholes option pricing model. The determination of fair value
for stock options on the date of grant using an option pricing model requires
management to make certain assumptions regarding a number of complex and
subjective variables. The fair value of RSUs and RSAs is based on the current
value of the Company's closing stock price on the date of grant less the present
value of future expected dividends discounted at the risk-free interest rate.
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At the closing of the Acquisition, and in accordance with the Merger Agreement,
certain service-based RSUs with respect to WageWorks common stock were replaced
by the Company and converted into RSUs with respect to common stock of the
Company. Certain other WageWorks equity awards were exchanged for cash. The fair
value of awards that were replaced or exchanged for cash was measured as of the
Acquisition date, and a portion of the fair value, which represented the
pre-Acquisition service provided by team members to WageWorks, was included in
the total consideration paid as part of the Acquisition. The remaining fair
value represents post-Acquisition share-based compensation expense.
For stock-based awards with performance conditions, the Company evaluates the
probability of achieving the performance criteria and of the number of shares
that are expected to vest, and compensation expense is then adjusted to reflect
the number of shares expected to vest and the requisite service period. For
awards with performance conditions, compensation expense is recognized using the
graded-vesting attribution method in accordance with the provisions of FASB ASC
Topic 718, Compensation-Stock Compensation ("Topic 718").
Upon the exercise of a stock option or release of an RSU/RSA, common shares are
issued from authorized, but not outstanding, common stock.
Interest Expense
Interest expense consists of accrued interest expense and amortization of
deferred financing costs associated with our credit agreement.
Income tax provision
The Company accounts for income taxes and the related accounts under the
liability method as set forth in the authoritative guidance for accounting for
income taxes. Under this method, current tax liabilities and assets are
recognized for the estimated taxes payable or refundable on the tax returns for
the current fiscal year. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, for net operating losses, and for tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be realized or settled. The effect
on deferred tax assets and liabilities of changes in tax rates is recognized in
income in the period that includes the enactment date.
A valuation allowance is provided for when it is more likely than not that some
or all of the deferred tax assets may not be realized in future years. After
weighing both the positive and negative evidence, the Company has recorded a
valuation allowance with respect to realized capital losses for which the
Company does not expect to generate capital gains in order to utilize the
capital losses in the future and with respect to certain insignificant state
credits which are not expected to be utilized before they expire. The Company
believes that it is more likely than not that all other deferred tax assets will
be realized as of January 31, 2020. The Company uses the tax law ordering
approach of intraperiod allocation in determining when excess tax benefits have
been realized for provisions of the tax law that identify the sequence in which
those amounts are utilized for tax purposes.
The Company has also elected to exclude the indirect tax effects of share-based
compensation deductions in computing the income tax provision recorded within
the consolidated statement of operations and comprehensive income. Also, the
Company uses the portfolio approach in releasing income tax effects from
accumulated other comprehensive income. The Company recognizes the tax benefit
from an uncertain tax position taken or expected to be taken in a tax return
using a two-step approach. The first step is to evaluate the tax position taken
or expected to be taken in a tax return by determining if the weight of
available evidence indicates that it is more likely than not that the tax
position will be sustained upon examination by the relevant taxing authorities,
based on the technical merits of the position. For tax positions that are more
likely than not to be sustained upon audit, the second step is to measure the
tax benefit in the financial statements as the largest benefit that has a
greater than 50% likelihood of being sustained upon settlement.
The Company recognizes interest and penalties, if any, related to unrecognized
tax benefits as a component of other expense in the Consolidated Statements of
Operations and Comprehensive Income. Changes in facts and circumstances could
have a material impact on the Company's effective tax rate and results of
operations.
Comprehensive income
Comprehensive income is defined as a change in equity of a business enterprise
during a period, resulting from transactions from non-owner sources, including
unrealized gains and losses on marketable securities prior to the February 1,
2018 adoption of ASU 2016-01.

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Asset acquisitions
The Company routinely acquires rights to be the custodian of HSA portfolios, in
which substantially all of the fair value of the gross portfolio assets acquired
is concentrated in a group of similar HSA assets and therefore the acquisitions
do not constitute a business. Accordingly, the acquisitions are accounted for
under the asset acquisition method of accounting in accordance with ASC 805-50,
Business Combinations-Related Issues. Under the asset acquisition method of
accounting, the Company is required to fair value the assets transferred. The
cost of the assets acquired, including transaction costs incurred in conjunction
with an asset acquisition, is allocated to the individual assets acquired based
on their relative fair values and does not give rise to goodwill.
Business combination
Consideration paid for the acquisition of a business as defined by ASC 805-10 is
allocated to the tangible and intangible assets acquired and liabilities assumed
based on their fair values as of the acquisition date.
Acquisition-related expenses incurred in conjunction with the acquisition of a
business are recognized in earnings in the period in which they are incurred and
are included in other expense, net on the consolidated statement of operations.
During the years ended January 31, 2020, 2019 and 2018, the Company incurred
expenses of $40.8 million, $2.1 million, and $2.2 million, respectively, for
acquisition-related activity.
Use of estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management has made estimates for the
allowance for doubtful accounts, capitalized software development costs,
evaluating goodwill and long-lived assets for impairment, useful lives of
property and equipment and intangible assets, accrued compensation, accrued
liabilities, grant date fair value of stock options, and income taxes. Actual
results could differ from those estimates.
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2016-02, Leases (codified as "ASC 842"),
which requires the recognition of lease assets and lease liabilities by lessees
for those leases classified as operating leases under previous guidance. ASC 842
requires that a lessee recognize a liability to make lease payments (the lease
liability) and a ROU asset representing its right to use the underlying asset
for the lease term on the balance sheet.
The Company adopted ASC 842 on February 1, 2019 using the modified retrospective
transition method with the adoption date as the date of initial application.
Consequently, prior period balances and disclosures have not been restated. The
Company has elected the package of practical expedients, which allows the
Company not to reassess (1) whether any expired or existing contracts as of the
adoption date contain a lease, (2) lease classification for any expired or
existing leases as of the adoption date and (3) initial direct costs for any
existing leases as of the adoption date. The adoption of ASC 842 on February 1,
2019 resulted in the recognition on the Company's consolidated balance sheet of
both operating lease liabilities of $40.6 million and ROU assets of
$38.0 million, which equals the lease liabilities net of accrued rent previously
recorded on its consolidated balance sheet under previous guidance. The adoption
of ASC 842 did not have an impact on the Company's consolidated statement of
operations, stockholders' equity and cash flows for the year ended January 31,
2020.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill
Impairment, which removes step two from the goodwill impairment test. As a
result, an entity should perform its annual goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount and should
recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting units' fair value. This ASU should be applied
prospectively. We adopted the standard effective February 1, 2019, which had no
impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and
Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. This ASU permits the capitalization of implementation costs incurred
in a software hosting arrangement. This ASU is effective for fiscal years
beginning after December 15, 2019. The Company elected to early adopt the new
standard as of October 31, 2019 using the prospective transition method. The
adoption of this standard did not have a material effect on the Company's
consolidated financial statements.

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Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit
Losses: Measurement of Credit Losses on Financial Instruments, which requires
financial assets measured at amortized cost be presented at the net amount
expected to be collected. This ASU is effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early
adoption is permitted. The Company does not plan to early adopt this ASU. The
Company believes the adoption of this ASU will not have a material impact on its
consolidated financial statements.
In August 2018, FASB issued ASU 2018-13, Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement, which amends ASC 820, "Fair
Value Measurement." ASU 2018-13 modifies the disclosure requirements for fair
value measurements by removing, modifying and adding certain disclosures. This
ASU is effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. Early adoption is permitted. As this relates
to disclosure only, the Company believes the adoption of this ASU will not have
a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes, which simplifies the accounting for
income taxes. This guidance will be effective for fiscal periods beginning after
December 15, 2020, and early adoption is permitted. The Company does not plan to
early adopt this ASU, and is currently evaluating the impact of the new guidance
on its consolidated financial statements.
Note 2. Net income per share
The following table sets forth the computation of basic and diluted net income
per share:
                                                                                      Year ended January 31,
(in thousands, except per share data)                             2020               2019               2018
Numerator (basic and diluted):
Net income                                                $  39,664          $  73,899          $  47,362
Denominator (basic):
Weighted-average common shares outstanding                   67,026             61,836             60,304
Denominator (diluted):
Weighted-average common shares outstanding                   67,026             61,836             60,304
Weighted-average dilutive effect of stock options
and restricted stock units                                    1,427              1,534              1,550
Diluted weighted-average common shares outstanding           68,453             63,370             61,854
Net income per share:
Basic                                                     $    0.59          $    1.20          $    0.79
Diluted                                                   $    0.58          $    1.17          $    0.77


For the years ended January 31, 2020, 2019 and 2018, approximately 0.3 million,
0.1 million, and 0.6 million shares, respectively, attributable to outstanding
stock options and restricted stock units were excluded from the calculation of
diluted earnings per share as their inclusion would have been anti-dilutive.
Note 3. Business combination
Acquisition of WageWorks
Overview and total consideration paid
On August 30, 2019, the Company closed the Acquisition of WageWorks for $51.35
per share in cash, or approximately $2.0 billion to WageWorks stockholders. The
Company financed the transaction through a combination of $816.9 million cash on
hand plus net borrowings of approximately $1.22 billion, after deducting lender
fees of approximately $30.5 million, under a term loan facility (see Note
8-Indebtedness).
Pursuant to the Merger Agreement, the Company replaced certain outstanding
restricted stock units originally granted by WageWorks with the Company's
equivalent awards. The outstanding WageWorks vested and unvested stock options,
and certain unvested restricted stock units, were settled in cash as specified
in the Merger Agreement. The portion of the fair value of partially vested
awards associated with pre-acquisition service of WageWorks award recipients
represented a component of the total consideration, as presented below.
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The Acquisition was accounted for under the acquisition method of accounting for
business combinations. Under this accounting method, the total consideration
paid was:
(in millions)
Aggregate fair value of WageWorks stock acquired                                 $      2,018.8
Fair value of previously owned investment in WageWorks stock                               81.4

Fair value of equity awards exchanged for cash attributable to pre-Acquisition service

                                                                    18.1
Fair value of equity awards replaced attributable to pre-Acquisition
service                                                                                     3.8
Total consideration paid                                                         $      2,122.1


Consideration paid was allocated to the tangible and intangible assets acquired
and liabilities assumed based on their fair values as of the Acquisition date.
Management estimated the fair value of tangible and intangible assets and
liabilities in accordance with the applicable accounting guidance for business
combinations and utilized the services of third-party valuation consultants to
value acquired intangible assets. The initial allocation of the consideration
paid was based on a preliminary valuation and is subject to potential adjustment
during the measurement period (up to one year from the Acquisition date).
Balances subject to adjustment primarily include the valuations of acquired
assets (tangible and intangible) and liabilities assumed, as well as tax-related
matters. The Company expects the allocation of the consideration transferred to
be finalized within the measurement period.
The following table summarizes the Company's current allocation of the
consideration paid:
(in millions)                                         Initial Allocation          Adjustments          Updated Allocation
Cash and cash equivalents                            $           406.8          $      (14.5)         $           392.3
Other current assets                                              56.5                   1.0                       57.5
Property, plant, and equipment                                    26.6                                             26.6
Operating lease right-of-use assets                               42.5                                             42.5
Intangible assets                                                715.3                                            715.3
Goodwill                                                       1,330.5                  (2.5)                   1,328.0
Other assets                                                       5.9                                              5.9
Client-held funds obligation                                    (237.5)                 17.8                     (219.7)
Other current liabilities                                        (69.1)                 (2.9)                     (72.0)
Other long-term liabilities                                      (26.7)                                           (26.7)
Deferred tax liability                                          (128.7)                  1.1                     (127.6)
Total consideration paid                             $         2,122.1          $          -          $         2,122.1


The Acquisition resulted in $1.33 billion of goodwill, which is attributable to
several strategic, operational and financial benefits expected from the
Acquisition, including custodial and interchange revenue synergies based on
current contractual relationships, as well as operational cost synergies
resulting from increased scale in service delivery and elimination of
duplicative management functions and other back-office operational efficiencies.
The adjustments to the initial allocation are based on more detailed information
obtained about the specific assets acquired, liabilities assumed, and
tax-related matters. The goodwill created in the Acquisition is not expected to
be deductible for tax purposes.
The preliminary allocation of consideration exchanged to acquired identified
intangible assets is as follows:
                                                                                       Weighted-average remaining
(in millions)                                                   Fair value            amortization period (years)
Customer relationships                               $            598.5                        15.0
Developed technology                                               96.9                        4.5
Trade names & trademarks                                           12.3                        3.0
Identified intangible assets subject to
amortization                                                      707.7                        13.4
In-process software development costs                               3.8                        n/a
Total acquired intangible assets                     $            711.5


The Company preliminary valued the acquired assets utilizing the discounted cash
flow method, a form of the income approach. The significant assumptions used in
the discounted cash flow analyses include future revenue growth and attrition
rates, projected margins, royalty rates, technological obsolescence, discount
rates used to present value future cash flows, and the amount of revenue and
cost synergies expected from the Acquisition.
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In connection with the transaction, for the year ended January 31, 2020, the
Company incurred approximately $40.8 million of acquisition costs, which are
recorded as other expense, net. For the year ended January 31, 2020, WageWorks
contributed revenue of approximately $184.7 million
Pro forma information
The unaudited pro forma results presented below include the effects of the
Acquisition as if it had been consummated as of February 1, 2018, with
adjustments to give effect to pro forma events that are directly attributable to
the Acquisition, which include adjustments related to the amortization of
acquired intangible assets, interest income and expense, and depreciation.
The unaudited pro forma results do not reflect any operating efficiencies or
potential cost savings that may result from the integration of WageWorks.
Accordingly, these unaudited pro forma results are presented for informational
purposes only and are not necessarily indicative of what the actual results of
operations of the combined company would have been if the Acquisition had
occurred at the beginning of the period presented, nor are they indicative of
future results of operations. The estimated pro forma revenue and net income
includes the alignment of accounting policies, the effect of fair value
adjustments related to the Acquisition, associated tax effects and the impact of
the borrowings to finance the Acquisition and related expenses.
                             Year ended January 31,
(in thousands)                 2020            2019
Revenue              $   798,253       $ 765,801
Net income           $    23,101       $   6,419

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